IRS Plans To Raid Workers' Tip Jars

When President Joe Biden signed the Inflation Reduction Act last year, the White House touted how the bill's $80 billion in new funding for the IRS would "make our tax code fairer by cracking down on millionaires, billionaires, and corporations that evade their obligations."

It now appears that some of those resources—and some of the coming crackdown on tax evasion—will, quite predictably, be aimed at individuals earning considerably less.

This week, the Treasury Department and IRS announced plans to overhaul existing programs that track tips earned by service sector workers. The new Service Industry Tip Compliance Agreement (SITCA) program will "take advantage of advancements in point-of-sale, time and attendance systems, and electronic payment settlement methods to improve tip reporting compliance," according to the IRS.

Of course, workers who earn more than $20 in monthly tips are already required to report their tips to their employers, and those tips are supposed to be included in tax data sent to the IRS.

But a lot of that money never finds its way into the government's hands. As part of the announcement on Monday, the IRS highlighted a 2018 Treasury Inspector General report that estimated $1.66 billion in tips went unreported during the 2016 tax year.

The IRS' proposal "streamlines both compliance with and enforcement of tip reporting requirements by eliminating employee participation," according to the notice published this week. Translation: We'll make sure the government gets its cut of those tips by simply removing workers from the transaction whenever possible.

That's something that the IRS can do now that so many tips are handled electronically, as secondary transactions after you buy a cup of coffee or pay your bar tab with a credit card. (So here's a tip: Use cash to thank a service worker whenever possible.)

The new SITCA program is not yet in place, and still has to work its way through the complicated federal approval process. The IRS will be collecting comments on the proposal until May 7. It could also be affected by a House-passed bill to rescind the new IRS funding included in last year's Inflation Reduction Act, though that proposal seems unlikely to pass the Democratic-controlled Senate or get Biden's signature.

That the IRS is going to use at least some of its new resources to go after workers' tips shouldn't come as too much of a surprise—despite all of the promises from Biden and top IRS officials about how no one earning less than $400,000 would be targeted. As Reason's Liz Wolfe reported in January, low-income taxpayers have always been the ones most likely to get hassled by IRS audits. In fact, during 2022, low-income wage-earners who qualified for the earned income tax credit were five times more likely to be audited than any other taxpayers, according to a report by Syracuse University's Transactional Records Access Clearinghouse.

It also fits snugly within the Biden administration's plans for a "comprehensive financial account reporting regime" that the Treasury Department outlined in 2021 with a promise to significantly increase the cost of tax evasion.

As far as the IRS' incentives go, targeting the working poor makes perfect sense. Wealthier Americans have the resources to fight back against an audit—but there might be $1.6 billion in unreported tips out there, and most of that was probably collected by people who don't have an accountant on retainer.