WASHINGTON – The Internal Revenue Service can use estimates to make sure it is collecting enough taxes on cash restaurant tips, the Supreme Court said Monday.
The court beefed up the IRS' power to calculate taxes that businesses owe from employees' tips, a thorny task because often the tips are cash and workers report their own earnings.
The ruling is a defeat for the estimated 200,000 restaurants with tipped workers, and many other businesses whose employees receive tips.
The court said the IRS can estimate the amount of cash tips given to employees based on tips shown on credit card receipts. The estimate is used to determine taxes.
Nationwide, employees reported collecting $14.3 billion in tips in 1999, although the IRS suspects that amount could be higher and has been working with restaurants to improve reporting.
This case pitted one of the nation's oldest Italian restaurants against U.S. tax collectors. The restaurant contends the IRS formula does not take into account stingy cash tips, takeout meals or tip-sharing among hostesses and other staff.
Justice Stephen Breyer, writing for the 6-3 court, said while the practice is not illegal, "we recognize that Fior D'Italia remains free to make its policy-related arguments to Congress."
The ruling is a follow-up to the Supreme Court's 1973 decision that the IRS can make an educated guess about employees' tip taxes when records are inadequate.
That case dealt with taxes owed by workers. At issue here is tax responsibilities of employers, who must pay 7.65 percent Social Security taxes on the tips their employees collect.
Fior D'Italia, which has been serving veal and pasta dishes in San Francisco for 116 years, had challenged an extra $23,000 bill that was calculated with estimates. Using credit card receipts, the IRS had figured that workers were tipped about 14 percent on meals.
In a dissent, Justice David H. Souter, said the court's decision "saddles employers with a burden unintended by Congress."
Also dissenting were Justices Antonin Scalia and Clarence Thomas.
The San Francisco-based 9th U.S. Circuit Court of Appeals said the IRS could not prove that people who paid with cash tipped 14 percent, and that the IRS therefore should stop using the estimates.
Monday's ruling says the IRS can resume the practice.
Restaurant owners contend that if the IRS suspects underreporting, it should individually audit workers.
The case is United States v. Fior D'Italia Inc., 01-463.