The primary aim of the IRS is the lawful collection of taxable revenue in the United States. This mission is complicated by the existence of certain business and personal services that engage in substantial cash-based transactions or have other “off-the-books” income. Service industries where tipping occurs pose a significant challenge for tax administrators.
This research effort was designed and executed in four stages. FMG performed the following tasks for each effort:
Literature Review and Methodology Assessment
FMG conducted an in-depth review of current tipping literature to determine demographic factors and variables that influence tipping behaviors. This literature review included an in-depth investigation of industries that commonly receive tips and any additional information concerning tipping norms and different tip amounts that are reported across industries.
Survey Development, Cognitive/Usability Testing, and Point-of-Sale Data Evaluation
FMG researchers developed a short survey questionnaire asking about respondents’ tipping behaviors within the previous 24 hours. This questionnaire included categories of commonly tipped industries and sub-industries to allow for additional skip logic in the questionnaire.
Following development of the survey questionnaire, FMG conducted interviews to determine faulty logic or language in the questionnaire and to determine if additional tipped industries needed to be included in the survey. Usability testing with computer and mobile devices was completed after cognitive testing to ensure ease of completion on all devices.
Additionally, FMG identified and procured a large dataset of tipping transactions from a Point-of-Sale (POS) restaurant vendor to determine if such a dataset could be used to help arbitrate the findings from the pilot study.
Pilot Survey Fielding and Sample Analysis
FMG designed and launched a one-month pilot test of the draft questionnaire on the two panels under consideration for the study’s full-fielding. One panel was an online probability-based sample and the other was a non-probability sample.
Upon completion of this project, the IRS will have quantifiable results that will project accurate tip paid and tip received amounts in different service industries. This information will help the IRS determine realistic proportions of income that is underreported on income tax returns.
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Vice President, Public Policy Evaluation