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Prison Terms Affirm IRS Campaign on Tip Income


Four Nevada casino workers were sentenced to prison this week for conspiring to underreport their tip income, in a case that could have implications for bartenders, barbers, restaurant servers and anyone else who receives tips as part of his wages.

"This is the first criminal prosecution regarding tip compliance in the country, and its consequences apply to all tip-earning employees everywhere, not just Nevada casino dealers," said Byram Tichenor, special agent in charge of criminal investigation for the Internal Revenue Service in Nevada.

The government criminally prosecuted the dealers because they cheated not only on their own taxes but also helped dozens of co-workers cheat too, said Natalie Collins, a spokeswoman for the U.S. attorney's office in Las Vegas.

Criminal prosecutions remain rare, but the government says it has become more aggressive in pursuing civil cases involving unreported tip income.

"The United States will continue to prosecute individuals who commit such offenses," U.S. Atty. Daniel G. Bogden said.

News of the case alarmed some Southern California workers who receive tips.

"I don't know anyone who is that careful about reporting every dollar," said a Glendale waitress, who asked not to be named for fear of IRS prosecution. "It's not even that you're trying to cheat on your taxes. It's that you've got cash in your pocket, and you spend it before thinking too much about how much you had."

Creating a fear factor was partly the point, some experts said.

"It is the IRS wanting to send a message," said Patricia M. Erickson, attorney for one of the Las Vegas defendants. "They want people to report 100% of what they earn in tips."

The case is the latest move in a decade-long effort by the government to boost disclosure of tip income, which is believed to be chronically underreported. A report by CCH Inc., a Riverwoods, Ill.-based tax research and information firm, estimated that $5 billion to $8 billion in tip income goes unreported each year.

The sentencing also comes on the heels of a Supreme Court decision, handed down in the summer, that held the managers of a San Francisco restaurant liable for their workers' underreported tips. That decision spurred the restaurant industry to seek relief from Congress.

This week Reps. Wally Herger (R-Marysville) and John S. Tanner (D-Tenn.) introduced the Tip Tax Fairness Act, which would stop the IRS from making employers responsible for reporting their workers' tip income to the government. Restaurant owners, in particular, say they object to be turned into "tip police" by the IRS.

In many casinos, however, the employer knows how much tip income is earned because dealers are barred from carrying cash on the casino floor under a system designed to deter theft.

Many casinos keep tip boxes at each gaming table. All the tips deposited in those boxes are turned in at the end of the day. The tips are distributed equally to all dealers on that shift, gaming industry officials said.

The individuals in the Nevada case, which dates to the mid-1990s, were charged with falsifying records to keep IRS estimates of their tip income artificially low, said spokeswoman Collins of the U.S. attorney's office.

The three dealers who were convicted--Belinda Mosdell, Leveda Taylor and Leo Shan How--were ordered to pay restitution of $1,148 to $1,532. Dale Seipp, controller of the Virgin River Hotel & Casino, where the dealers worked, was convicted of aiding the conspiracy and fined $1,388.

Each of the four also was sentenced to six months in prison, government officials said.

Published reports said the workers submitted records listing their tip rate at $5.50 an hour. Their true hourly tip rate was $7.05 to $10.46, prosecutors said.

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