A waitress reported $467 of tips to her employer last year. Two month after she

Question

A waitress reported $467 of tips to her employer last year. Two month after she filed her federal income tax return, she received a letter from the IRS informing her that she had earned $5,260 in tips rather than the $467 she reported and she now owed the government $1872.94 in back taxes. A. How is the IRS able to determine the amount of tips the waitress received? B. If the IRS is correct, is the waitress subject to a penalty for not having withheld payroll taxes on all the tips she received during the year?

Explanation / Answer

Part A

An allocated amount of tips received by the total amount off the receipts from food and beverage operations will be reported to the IRS by the food and / or beverage establishment.

Part B

No, Atlantis will not be subject to a penalty for not having withheld taxes. Federal income taxes are to be withheld only on the reported tips and not on the tips merely allocated. They can only tax what was reported from a waitress.

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