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Sabolic Petitioner vs. CIR: Tip Earnings under Scrutiny

As our Nevada tax lawyers have experienced for many years, people who work for tips find themselves in a unique position when it comes to reporting their taxes. They are employees, yet they also generate some of their own income, independently of what their employers pay them. Yet they are not classified as independent contractors because many of them still receive an hourly wage, albeit a nominal one.

Regardless of how much their employers pay them, they are still responsible for keeping track of how much they are paid in tips – and, arguably most importantly to the IRS – paying what they owe in taxes. If taxpayers don’t accurately report their tips and pay the appropriate taxes, the IRS will come calling.

Bartender counting his tips at bar counter

That’s exactly what happened to one bartender in Las Vegas. The IRS argued that he did not keep appropriate records of the tips that he was paid, and it recalculated his earnings and charged him penalties for underpayment of taxes. The man brought the case to court, and he prevailed, getting the penalties dropped.

The man, Alan Sabolic, was a bartender at the MGM Grand Hotel and Casino. He had worked as a bartender for 20 years, and he had always participated in the Gaming Industry Tip Compliance Agreement Program (GITCA), which sets an automatic rate for tips. Employees who participate in the program do not have to keep records of their tips or to report their actual tip income. They just pay a rate based on tips calculated by the number of hours they work.

For the tax years, 2009, 2010, and 2011, Sabolic opted out of this program because an economic downturn reduced business and resulted in his earning fewer tips. He felt that the tips calculated by the program were more than he was actually earning.
Each night that he worked, Sabolic reported that he generated a printout of the tips he was paid by credit card, and he wrote down cash tips in his own record book. He put any change from tips into a cash tip jar, and he gave a tip out to the bar back (who bussed tables and cleaned dishes) at the end of the night.

The IRS looked at the records of hours worked, sales, and credit card tips from MGM and determined that Sabolic had underreported his tip income. The agency then used its own calculations to determine what his tip income likely was. After a series of complex calculations, the agency found that he had underreported his income by $19,729 for 2009, $19,000 for 2010, and $20,284 for 2011.

The court looked at four primary issues when reaching its ruling. To start, the IRS argued that his records were suspicious because they all indicated whole dollar amounts for tips, which is not universal practice. Sabolic argued that he made a practice of putting any change into the cash tip jar and only recording the whole dollar amounts for simplicity’s sake. When enough change accumulated in the jar, he would cash it out, again reporting the whole dollar amount and leaving any remaining change in the jar. The court found his argument persuasive.

Second, the IRS cast doubt on Sabolic’s income totals because he did not keep a record of how much he tipped the barback at the end of the night. Sabolic said he routinely tipped between 10 and 20 percent, but he only deducted 10 percent when reporting his tip income. The court agreed that he should have kept a record of these tip outs, but that this one factor did not render all his records inaccurate.
Third, the IRS cast doubt on Sabolic’s reporting because some of the days he listed deviated from the days recorded by MGM’s payroll system and because some days appeared to be missing from his record. Sabolic argued that missing days were the result of vacation time or changes to his work schedule to accommodate the company’s needs. He argued that changes from MGM’s records were the result of problems with the company’s time system, which would sometimes fail and make it impossible for employees to log in or would cause discrepancies in their actual day or times worked.

Finally, the IRS argued that there were discrepancies between what Sabolic recorded and what he reported on his tax returns. Sabolic argued that the discrepancy existed because the dates on his W2s followed payroll dates, not necessarily the calendar dates, which his record book did follow.

Ultimately, the court found Sabolic’s arguments convincing, and they dismissed the penalties against him. His case was helped significantly by the fact that he kept the records that he did. He could have been facing a significantly different outcome without those records.

This case shows the need for those who earn tips to maintain careful records and to get professional tax advice. Without an Gilbert tax attorney, you may not have the same success in court if you have to fight penalties or charges from the IRS.

Call Silver Law today if you are under audit by the IRS or if you are facing penalties or charges. Our tax attorneys will help you explore your legal options for minimizing your tax liabilities and contesting the penalties or charges. We represent clients in civil and tax litigation, foreign tax reporting cases, and more. Call us today to talk with a tax attorney.

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