Thursday, March 19, 2015
Bartender beats IRS in Tax Court
Tax Court rules for Bartender on his Tip reporting method over IRS's reconstruction method The United States Tax Court held that the actual tip income from a bartender's own records was a better reflection of his income than the Internal Revenue Service’s version based upon reconstructing his tip income. By way of background, I.R.C. Sec. 6001 and Treas. Reg. Sec. 31.6053-4 require those who earn tips to keep accurate and contemporaneous records of their income. The IRS has the authority to recompute tip income as it determines if the tip earner fails to produce adequate records. In Sabolic v. Comm., TC Memo 2015-32 (T.C.M. 2015), a bartender had a set routine of how he recorded his tips at the end of each shift but IRS claimed that the bartender had underreported his tip income and because his tip logs were recorded in whole numbers; he did not keep track of how much he paid to the bar backs; and the logs did not include all days. IRS reconstructed the bartender's tip income by determining a “charge tip rate” for each tax year. But, the Court sided with the bartender fully reported his tip income. In the Court’s analysis, it did state that the IRS does have great latitude in adopting a suitable method for reconstructing tip income and its method of recomputing income carries with it a presumption of correctness and therefore, the burden of proof was on the bartender. But the Court sided with the taxpayer on all three challenges: round numbers, payments to bar backs and missing days. In sum, the Court concluded that the bartenders actual records were more accurate than the IRS’s reconstructed method and therefore ruled for the bartender. Many bartenders receive tips that are higher than the Internal Revenue Service method and therefore this case is not helpful. But for those who are not earning tips as high as the IRS method, any tip earner should keep accurate records and fight the IRS if necessary.