Court affirms power to catch tip cheating

Tuesday, June 18, 2002

WASHINGTON -- The Supreme Court gave the Internal Revenue Service its blessing Monday to aggressively audit restaurants to catch underreported tips.

Justices said Congress, not the court, was the appropriate venue for a challenge to IRS auditing techniques.

The 6-3 ruling is a defeat for the 200,000 restaurants with tipped workers, and many other businesses with employees who receive tips.

"Obviously this isn't the end of the game. The next battle will be up on Capitol Hill," said Peter Kilgore, senior vice president for the National Restaurant Association.

The calculating of taxes that businesses owe from employees' tips is a thorny task because often tips are cash and workers report their own earnings.

The Supreme Court said a federal law permits the IRS to estimate the amount of cash tips based on tips shown on credit card receipts. The estimate is used to determine a restaurant's tax bill.

The ruling does not affect individual audits of employees.

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