Anita Leland, a waitress in Atlantis Casino, reported tips of $467 to her employer last year. Two months after she filed her federal income tax return, Leland received a letter from the IRS informing her that she had earned $5,260 in tips rather than the $467 reported and that she owed the government $1,872.94 in back taxes.
a. How is the IRS able to determine the amount of tips received by a waitress in a casino?
b. If the IRS is correct in its determination of the tips received, is Atlantis subject to a penalty for not having withheld payroll taxes on all the tips Leland received during the year?