Aug. 19, 2006 - A nasty dust-up over taxes owed on tip income has Las Vegas bar and restaurant workers seething and the Internal Revenue Service beating a hasty retreat -- for now.

The ruckus, which reached a head at a so-called "tip summit" between IRS and hotel-casino industry representatives on Thursday, stemmed from two recent developments that insiders said may or may not be related.

The first involves negotiations between the IRS and Culinary Local 226 to revise and extend three-year tip agreements that are set to expire this month. Those negotiations appeared to have been at a loggerhead.

At the same time, the IRS has been sending notices to thousands of local workers saying they are being audited or that they owe additional taxes because they underreported their tip income.

The notices subjected the affected workers to back tax liabilities and penalties, possible prosecution for tax evasion and possible liens on their homes, Culinary union spokesman Kevin Klein said Friday.

The notices also abrogated a longtime pact between local casino workers and the IRS in which the federal agency promised not to audit workers who agreed to have their taxes withheld by their employers based on an agreed-upon formula to calculate their tip income, he said.

Under the 15-year-old program, each worker's reported tip income is determined by their position, the property they work at and their work shift. The intent of the program is to make it easier for the IRS to ensure compliance and relieve individual workers from having to keep an exact records of all their tips.

Participants said Thursday's meeting started off acrimoniously, with gaming companies complaining about the audit notices and the problems their workers are encountering.

"People are very upset," Klein said. "(The IRS) blew it on this. They negotiated rates three years ago and should have just stuck with it."

The IRS is saying in its notices to workers that they underreported their tip income by $2,000 to $6,000 a year, he said.

Marvin Naus, a food server at Sir Gallahad's Pub and Prime Rib House in Excalibur for 13 years, has been snared in the dispute for almost a year.

He got a notice in September that he failed to report $5,000 in tip income and owed an additional $1,700 in taxes.

That's because he worked in three different restaurants at different times, and MGM Mirage reported his tip income under the three formulas appropriate to each restaurant.

Even when Excalibur documented his employment and confirmed his estimated tip income was correct, the IRS refused to relent.

Naus, who called the situation intimidating, said after an exchange of nine letters, the IRS has reduced its claims against him to $542.

"It's too bad. We had a win-win situation the way it was set up. We liked the tip rates and the absence of audits. Now they just changed the rules," he said.

Some employees hit by surprise with the letters from the IRS have just gone ahead and paid the disputed amounts, sources said.

Others, like Naus, have contested them with little success, which may also be contributing to the tensions over the issue.

For now, a gaming company executive said, "The main message from the hotel industry is if a worker gets a notice, he or she should not pay it, but go to their supervisor to see what can be done."

If the IRS continues sending out notices, there is a real risk the program will implode because workers who see it as unfair will opt out, Klein said.

Naus, for one, said he and a lot of his co-workers will walk away from the program if the IRS breaks its agreement.

That wouldn't benefit the IRS, which has managed to privatize its tax collection with the agreements; or the 50,000 workers, 35,000 of whom are Culinary union members, who are free from the fear of audits; or gaming companies whose tax withholding is vastly simplified by the program.

"The ultimate goal is to be fair," said American Gaming Association Vice President Wally Chalmers, who was at Thursday's summit.

"It's worked for over 10 years. But if new rates aren't fair, workers will take a second look, and the program will fall apart," he said.

Thursday's meeting ended on a better note than it started, although industry insiders said they doubted the issue will be resolved before December.

Industry officials said the participants seemed to reach some agreement on four points raised by Culinary union representatives.

The union is seeking better communications with the IRS, a grace period for workers being notified by the agency while a new agreement is being negotiated, and new tip calculations based on a worker's shift and where they work. It also wants the IRS to act fairly toward workers who sign up for the voluntary program.

Also, gaming company executives agreed with IRS officials that it was reasonable to look at adjusting the amount of tip income that is being withheld from workers' pay because it has not been reviewed in years, especially considering the proliferation of high-end amenities on the Strip.

A gaming executive, who asked not to be named while the program is being negotiated, said the companies also want the IRS to implement any new formulas all at once.

Otherwise, the companies fear workers will be jumping from one casino to another to take advantage of different tip income projections.

Another executive conceded that there is some tax cheating by workers signed up in the program.

Specifically, some employees jump in and out of the program as their tip income goes over and under the applicable formula.

At the summit, the IRS agreed to extend the deadline for back taxes owed and audits until the end of the year, taking the immediate pressure off workers, according to a Washington source who asked not to be named because he was not at the meeting.

The agency also agreed to set up an internal task force to review tip rates and compare them to actual tip income that is reported in other cities, he said.

Meanwhile, Culinary union officials got busy Friday organizing committees at every major casino and scheduling a follow-up meeting with gaming executives to plot strategy to resolve the issue, Klein said.

IRS spokesman Raphael Tulino on Friday declined to confirm or deny the outcome of the meeting because he is prohibited from discussing specific cases.

Other sources in Washington said the IRS is interested in not seeing the issues "over-hyped" because of the delicate negotiations now under way.

"This was the first meeting in a process of meetings," another Washington source said. "Lower level IRS bureaucrats were the source of the problem. Now, higher-ups have to see what can be done to break the logger-head."

Nothing more concrete is likely to happen until after Congress returns from its recess on Sept. 5, Chalmers said.

"But I'm optimistic. I think some real progress was made yesterday," he said.

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