IRS power in catching tip cheating affirmed

WASHINGTON (AP) -- 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.