Smoke Signals
10 JUNE 15, 2005
IRS Sticks Its Hands In The Tip Jar
Tribal Council intends that the deal will safeguard employees from IRS audits.
By Ron Karten
Tribal casinos are not betting
against the Internal Revenue Service
(IRS).
Across the country, the taxing
agency is developing agreements with
the employers of tip-earners. The pur
pose of the agreements is to increase
tax revenues for the government. The
result for most employees is less heft
in their paychecks.
At the Spirit Mountain Casino, no
body appears to be entirely happy about
the signing of tip agreements with the
federal agency, but sign they do.
In Grand Ronde, the Tribal Council
"wanted something fair," said Tribal
Council Chairwoman Cheryle
Kennedy, "not something that would
negatively impact the employee." The
Tribe worried that absent an agree
ment of this sort, some casino employ
ees could face huge tax problems.
As the IRS implements agreements
aimed at increased tip reporting at all
Tribal casinos, everyone from food and
beverage staff to dealers are chipping
in more each paycheck, to the tune of
$100-plus on every paycheck.
Historically, the attraction of tip earn
ing jobs has been that much of it re
mains off the books. Not so, anymore.
IRS studies of Pacific Northwest tip
earners indicate that those working
under IRS agreements pay taxes on an
average $13.21hour ($26,420year)
including tips and salaries while those
without tip agreements report earn
ing an average of $9.33hour ($ 18,660
year), according to Ken Voght, Man
ager of the IRS's Outreach Planning
and Review Office.
Agreements between casinos and
the IRS such as the Gaming Indus
try Tip Compliance Agreement
(GITCA) make this minor windfall
for the government possible.
The process of securing GITCAs in
volves individual negotiations with
each casino. The goal of these nego
tiations is to come up with an amount
of tips that when added to salary will
fairly represent the earnings of each
employee. Taxes on both salary and
the agreed-upon level of tips is then
paid by the casino before the employee
receives hisher checks.
The decision takes into account shift
differences and particular hours that
a tip-earner works, the size of the com
munity and the tipping experiences of
tip-earners in comparative facilities.
IRS "overtures" to the Spirit Moun
tain Casino began more than four years
ago, according to Kennedy. Negotia
tions between the agency and the casino
were more than a year in the making,
according to Randy Dugger, Director of
Guest Services at the casino.
As casino leaders negotiated with
IRS agents, they also kept employees
informed about the coming changes
and what choices tip earning employ
ees would have, according to employ
ees of the casino.
Tip earners on table games chose to
pool their tips. The total in tips goes
through the casino's accounting de
partment and then is divvied up to
employees according to hours and
shifts worked, and taxed on the way.
Poker dealers and food and beverage
servers opted for an hourly-rate
method, This method establishes a
certain tip rate per hour, but accom
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the hours when the employee is in a
position to receive tips; not, for ex
ample, when the employee is stocking
or cleaning.
These averaging plans mean that
when business is slow, employees might
pay more taxes than the tips indicate
but when business is hopping, employ
ees pay less. That, however, is not the
effect of the agreement in practice.
"It forces us to leave at the slow
times," said nine-year Buffet Wait
StafTer Keli Campbell, "because the IRS
takes too much." That means she loses
her scheduled hourly rate because it's
not worth working when taxes are go
ing to come out of tips that don't exist.
Legends servers took an option that
taxes them on a percentage of sales.
This option is possible because Legends
keeps track of all sales and who makes
them, while, for example, that's not
true of table games.
A tip earner who asked not to be
identified said that employees are mov
ing out of tip-earning positions to avoid
the problem altogether.
And while employees are overwhelm
ingly unhappy about having their tips
counted for them and reduced by the
time the checks come out, the IRS has
put the best face on the process.
By joining the agreement, IRS
sources said, for example, that each
employee is indemnified from being
audited based on their reported tips,
fice of Indian Tribal Governments.
The new IRS took on Las Vegas ca
sinos first, but its tentacles have been
reaching into Tribal casinos ever since.
The IRS now has agreements with
90 of the 208 Tribes with casinos across
buffet Wait Staffers like Misty Hunt,
Campbell and Cindi Crowe, earning in
the neighborhood of that average
$13.21 an hour, are now filling the
gaps left in the nation's budget by
Prudential Financial with well over
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the country, according to Voght. Here
in Oregon, the agency has agreements
with six of the nine federally recognized
Tribes in the state. All nine own and
operate a casino.
Not A Universal Principle
Taxing American individuals and
businesses on all earnings is not a
universal principal, however. Between
2001 and 2003, according to a joint
project of Citizens for Tax Justice &
the Institute on Taxation and Economic
Policy, 82 major U.S. companies paid
zero or less in federal income taxes in
at least one year.
"In the years they paid no income tax,
these companies earned $102 billion in
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Fair Play Buffet wait staffers (1 to r) Keli Campbell, Cindi Crowe and Misty
Hunt, all who have worked at the casino for nine years or more, have seen their
paychecks shrink and their schedules affected by the recent IRS agreements.
and also, of course, is freed from the
job of keeping track of tips for poten
tial audits. (In the event of an audit,
an employee can best make a case
with records of tips that have been kept
in writing on a regular basis.)
In addition, these sources said, the
increased amount of reported income
should translate into a larger Social
Security check down the line or higher
disability payments should they be
come necessary. It also means that
employees may do better on credit re
ports and loan applications.
The Spirit Mountain Casino signed
these agreements with the IRS last
year, and in October began its first
year under the agreements.
The IRS was organized along geo
graphic lines until 1998. Today, the IRS
is structured around customer groups,
sajd Christie Jacobs 4 Director of the Of-
pretax U.S. profits," the report said.
"But... these companies generated so
many excess tax breaks that they re
ceived outright tax rebate checks from
the U.S. Treasury, totaling $12.6 billion.
These companies' 'negative tax rates'
meant that they made more after taxes
than before taxes in those no-tax years.
'Twenty-eight corporations enjoyed
negative federal income tax rates over
the entire 2001-03 period. These com
panies, whose pretax U.S. profits to
taled $44.9 billion over the three years
included, among others: Pepco Hold
ings (-59.6 percent tax rate), Pruden
tial Financial (-46.2 percent), ITT In
dustries (-22.3 percent), Boeing (-18.8
percent), Unisys (-16.0 percent), Fluor
(-9.2 percent) and CSX (-7.5 percent),
the company previously headed by our
current Secretary of the Treasury."
As a result, Spirit Mountain Casino
$2 billion in untaxed profits and Gen
eral Electric, where 74 percent of
nearly $37 billion in annual profits
went untaxed in the years 2001-2003,
according to the report.
While these giant corporations end
up with negative tax balances, new
tipping requirements have resulted, in
a few instances, in employees at Spirit
Mountain Casino ending up with nega
tive check balances. Some of these em
ployees have opted for an expensive
combination of health and 401-K plans
and in some cases a garnishment or
two has opted for them.
In one case, an employee concerned
about retirement scheduled more to go
into her 401-K plan than her paycheck
could cover with the higher level of taxes.
"It's been difficult for some," said
Dugger, "not just financially but it's
also a hit on their morale."
"When you're expecting the income
after, what, nine years, it's tough to
adjust to the tips not being there," said
Campbell.
"It's hard to make the payments," said
single mom and nine-year staffer
Crowe. Every two weeks, she said, her
paycheck is $100 lighter.
The question is not a simple one for
Tribal Council and casino administra
tors. They know that a number of vet
eran gaming employees have seen first
hand the problems that audits can
cause when the money is spent but taxes
are still owed.
"We garnish wages," said Christie
Jacobs. "If that's not possible, we'll
take money out of your bank account,
if you have one. Then, we'll start
looking at what you own, what we can
take. It starts with your house, your
car. To me, the main good thing
about this (agreement) is, it takes all
of that worry away."
These casino-IRS agreements in
demnify both employee and employer
against tip-related audits.
Currently, the IRS audits less than
one percent of all tax returns, accord
ing to Voght.
Without the agreements, the casino
also has potential liabilities when the
IRS audits casino employees, said
Dugger. "Whenever there's an audit
and employee taxes are shown to have
not been paid, the employer is respon
sible for the employer's end."
Employers have long tried to avoid
such agreements, not only because of the
extra work the agreements require, but
also because they are morale killers for
employees. Courts, however, have sided
with the IRS when employers argue that
they should not be the tips police.
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