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IRS Believes More People Are Reporting Tips - But Figure Is Still Low

May 27, 1986

WASHINGTON (AP) _ Since 1981, Congress has increased penalties, toughened reporting requirements and given the Internal Revenue Service new powers in an effort to reduce tax cheating. There is evidence parts of the crackdown are working.

The IRS estimated that only 16 percent of taxable tips was reported as income in 1981 - a non-compliance rate exceeded only by that for illegal income. The following year, Congress stiffened reporting rules for tips, requiring larger eating and drinking establishments to allocate 8 percent of their receipts to tipped employees. It then would be up to the employee to prove that he or she did not receive tips averaging 8 percent.

The system works, a new IRS survey indicates. Over $2 billion of additional tip income was reported in 1983 and 1984 - a 108-percent increase in 1983 and 124 percent in 1984. That doubled compliance to 32 percent. The report notes, however, that ″two-thirds of this type of income is still not being reported.″

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On the last day before Congress leaves for a recess, members usually introduce a large number of bills, presumably to have something new to talk about with their constituents. Here are some of those offered last week before the start of the Memorial Day recess:

-Sen. David Durenberger, R-Minn., chairman of the Finance subcommittee on health, introduced three optional ways for the tax treatment of health insurance. They propose various combinations of taxing employer-paid insurance and granting tax credits and deductions tied to income.

-Rep. Barbara Mikulski, D-Md., asked that taxpayers be allowed to set up tax-deductible accounts, similar to individual retirement accounts, to pay for long-term care.

-Rep. Richard Stallings, D-Idaho, called for overturning a long-held Internal Revenue Service position - reiterated recently - requiring that points paid for mortgage refinancing be deducted over the life of the loan, rather than in one year.

-Rep. Bill Archer, R-Texas, and two dozen colleagues introduced a bill to repeal the ″windfall-profits″ tax on oil.

-Rep. Doug Barnard, D-Ga., called for tax-free treatment of free travel allowed an employee aboard a company plane if the seat would otherwise be empty. The free ride already is tax-exempt if provided by a commercial airline to its employee.

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Taxpayers, the IRS and the courts spend a large amount of time arguing over when a person may claim a tax deduction for maintaining an office in his or her home. In most cases, the Tax Court has come down on the side of the IRS, holding generally that a deduction is allowed only when the home office is the focal point of the business - where services are provided to customers, for example.

Ernst & Whinney accountants point out that appellate courts have been overruling the Tax Court in recent months. In one, the 2nd U.S. Circuit Court of Appeals allowed a teacher a deduction on grounds she had to perform research and writing at home.

In a more recent case, the 7th Circuit Court considered several factors, including time spent in the home office and the importance of the office in rejecting the Tax Court test. ″This consistent shift in emphasis may result in more home-office deductions being allowed,″ according to Ernst & Whinney.

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A builder was required by contract to pay non-union workers on a project an additional $6.50 an hour to make their compensation equal to that of union employees. The extra cash makes up for non-cash benefits that union members receive but which are not subject to Social Security tax. The contractor asked the IRS whether Social Security taxes must be deducted from the $6.50.

Yes, the IRS said in a private letter ruling, even though the two classes of workers are doing the same work and the union members’ benefits are not taxable for Social Security. Only specific benefits cited in the law - including pension payments and health insurance - are exempt from that tax, the IRS held.

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