The IRS has announced plans to target service sector workers over unreported tips

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 who avoid their obligations.” .”

Now it appears that some of these resources — and some of the upcoming crackdown on tax evasion — will be targeted, quite predictably, at substantially lower earners.

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

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

But much of that money does not go to the government. As part of Monday’s announcement, the IRS highlighted a 2018 Treasury Inspector General report showing that an estimated $1.66 billion in tips went unreported in the 2016 tax year.

The IRS proposal “streamlines both compliance with and enforcement of tip reporting requirements by excluding employee participation,” according to a notice released this week. Translation: We’ll make sure the government cuts those tips by removing workers from transactions whenever possible

The IRS can now handle so many tips electronically as a secondary transaction 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 must still work through the complex federal approval process. The IRS will collect comments on the proposal until May 7. It could also be affected by a House-passed bill to roll back new IRS funding included in last year’s Inflation Reduction Act, though that proposal appears unlikely to pass the Democratic-controlled Senate. Or get Biden’s signature.

It shouldn’t be too surprising that the IRS is going to use at least some of its new resources to follow staff suggestions — despite all the promises from Biden and top IRS officials about how no one makes less than $400,000. will be targeted. as becauseAs Liz Wolfe reported in January, low-income taxpayers are always hit hardest 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 taxpayer, according to a report by Syracuse University’s Transactional Records Access Clearinghouse.

It also fits into the Biden administration’s plan for a “comprehensive financial account reporting system” that the Treasury Department outlined in 2021, promising to significantly increase the cost of tax evasion.

As far as IRS incentives go, targeting the working poor makes perfect sense. Wealthy Americans have the resources to fight an audit—but there could be $1.6 billion in unreported tips, and most of that was likely collected by people who don’t have accountants on retainer.