IRS’s Gaming Industry Tip Compliance Program

Las Vegas is an international, first-class, tourist destination. As the city has matured, Las Vegas now hosts some of the finest celebrity-run restaurants and bars. Tourism and gaming drive the Las Vegas economy, and as such, many local residents are employees of hotels, casinos, and restaurants and earn tip income in addition to their regular wages. Because tips constitute compensation for services, they must be included in gross income. The challenge for employees earning tips is making sure they correctly report those tips when they file their tax returns. When you need help navigating your taxes, enlist the help of the Las Vegas IRS lawyers at Silver Law PLC.

Gaming industry employees who earn tips have the choice of participating in the IRS’s Gaming Industry Tip Compliance Program (GITCA). The IRS touts GITCA as a partnership between the gaming industry and the IRS to promote tax compliance for tipped employees. Under GITCA, an average tip rate is established for tipped employees in specified occupational categories: bartenders, valets, dealers, and cocktail servers, for example. Participating employees are relieved of the burden at the end of the year of manually counting their tips and reporting that income on their tax returns. Instead, the employer’s payroll department multiplies an employee’s number of hours worked by the applicable tip rate to arrive at taxable tip income which is then reported on the employee’s Form W-2. In addition, GITCA participating employees receive a “free pass,” since under the agreement, the IRS commits not to perform tip audits. GITCA originated in Las Vegas and has expanded to casinos throughout the United States.

While participation in GITCA is convenient for tipped employees, it is not required. For those who opt out of GITCA, it is vital to keep detailed records in case of an IRS examination. Specifically, the Employment Tax Regulations require tipped employees to maintain a daily record or other similarly reliable evidence of their tips. A recent Tax Court opinion from a trial in Las Vegas highlights these record keeping requirements.

In Sabolic v. Commissioner, T.C. Memo 2015-32, Alan Sabolic was a bartender with over 20 years of experience working at the MGM Grand Hotel and Casino. During 2009-2011, Sabolic chose to remove himself from the GITCA program. Because he opted out of GITCA, Sabolic was required to self-report his cash tips to MGM Grand and keep personal records of how much he received in tips. So at the end of each shift, Sabolic would add up his tips and enter the total in MGM Grand’s computer system; he would then tip-out his barbacks, and give loose change from his cash tips to the bar’s cashiers. Finally, Sabolic kept a daily personal tip log, recording the total amount on a slip of paper. He reported between roughly $18,000 and $24,000 in tips for the tax years 2009 through 2011on his tax returns, taking the appropriate deductions for tip outs.

The IRS audited Sabolic and argued that his records were inadequate. Using its own methods, the IRS reconstructed Sabolic’s tips and determined that he underreported his tip income by about $20,000 each year. Sabolic challenged the IRS in United States Tax Court and won. Though the Court reiterated that the IRS has great latitude in reconstructing a taxpayer’s income during an audit, in Sabolic’s case, the Court also found that his recordkeeping was adequate and that he credibly testified at trial regarding his methods and daily procedures for keeping track of his tips.

Many Las Vegas residents rely on tip income to supplement their wages. It is important for these employees to understand GITCA and the requirements for opting out of this agreement with the IRS. The Sabolic case highlights the detailed recordkeeping requirements for such employees.

Silver Law PLC operates in Arizona and Nevada and all of its lawyer are former lawyers for the IRS. A Arizona tax law lawyer from our team can help you understand how the complex tax code applies when you are an employee earning tips. We’ll help you ensure that you are meeting your obligations. If you have been audited or are facing collections, we can also help you navigate that process. We can either find ways to bring down your tax debt or can negotiate a settlement for you. Call us today to talk with a local Las Vegas tax lawyer and learn more.

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Silver Law, PLC

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