IRS crackdown of 2008 has ripple effect on Las Vegas nightclubs

By Liz Benston

Thursday, Nov. 11, 2010 | 2 a.m.

Richard Chu had done quite well for himself as a host at Pure nightclub at Caesars Palace, cultivating customers, escorting them inside and landing them the best tables in the house.

How well did he do? The IRS says he failed to declare at least $112,000 in income, most of it in tips, in 2006. This week, he pleaded guilty.

With that plea, the feds finally landed their first conviction in connection with the high-profile Internal Revenue Service raid of the club and its management offices in 2008. The raid was intended at the time to serve as a warning to the entire club industry that nightclub workers better be reporting their tips.

The regulatory crackdown was “inevitable,” a nightclub insider said, given the massive sums earned by the clubs and the unavoidable, yet controllable, activities such as drug use and prostitution that occur inside.

“Everyone’s gotten tighter on stuff like checking IDs. And they have drug policies posted everywhere,” he said.

Authorities have moved against other activities, too.

Planet Hollywood was fined $500,000 by the Nevada Gaming Commission last year for allowing illegal activity to run rampant at its now-defunct Prive nightclub. During last year’s pool season, Metro Police arrested several people on prostitution and drug charges at pool parties hosted by the Rio and Hard Rock resorts.

So did the 2008 Pure raid successfully serve as a warning shot across the bow of the nightclub industry to clean up its act?

Hard Rock’s recently installed CEO, Joseph Magliarditi, conducted random drug testing of nightclub staff, security staff and even company executives — a move some casino insiders have called unprecedented in a business that typically only tests employees as they are hired.

Wynn Las Vegas banned socialite Paris Hilton from the property in September after she was charged with cocaine possession. Around the same time, Hilton’s boyfriend Cy Waits was fired from his high-profile nightclub operations job at Wynn after his DUI arrest.

And rapper Lil Wayne, prohibited from consuming alcohol after his release from jail, was recently banned from a party at Wynn.

Some companies have tightened their tip compliance procedures as a result of increased scrutiny from the IRS. Some nightclub workers, including cocktail servers, say they participate in a voluntary tip compliance program with the IRS in which workers are assessed taxes on predetermined estimates of their tip earnings.

Some nightclub workers say they are required to attend workshops hosted by Metro that cover such topics as checking IDs and handling drunk customers safely.

Some nightclub operators in town didn’t want to discuss with the Sun whether they have tightened their procedures in the wake of the raid and the Control Board’s increasing vigilance.

As for Pure Management itself: It announced this year a regulatory compliance program with assistance from Nevada gaming regulators, including participation in security seminars conducted by state regulators and daily communication with casino security outside the club.

Then-CEO Ned Collett also halted a traditional nightclub practice of giving tables to customers based on the amount of liquor they drank — an amount that could change during the night and led to heavy tipping — and instead assessed them a minimum table charge based on the table’s proximity to the action. This practice, believed to be a more professional system of charging customers for nightclub amenities than the tip-based methods some clubs use, has not spread across the industry despite support for it among some nightclub workers.

Pure Management was recently acquired by Angel Management Group, which could not be reached for comment. Collett left with the takeover.

Paul Camacho, IRS special agent in charge of criminal investigations in Las Vegas, would not elaborate on how Chu’s prosecution factors into the 2008 investigation — or whether the government will file charges against other nightclub workers.

“When you follow the money sometimes it takes time. There’s a lot of moving parts,” Camacho said.

The agency has devoted more resources to investigating cash-rich industries in town, including nightclubs, he said.

“It’s no secret that, unlike any other town, there’s a high concentration of people in Las Vegas who make most of their money in cash. We know that it’s not just cocktail servers and blackjack dealers who are receiving these payments.”

Some people in town call tips by another name, “gifts,” in a possible attempt to complicate the simple fact that such earnings are taxable, Camacho said.

Such attempts won’t fly, he said.

“Close to 90 percent of (tax) cases that go to trial end in conviction. Anyone who wants to roll the dice on not paying their taxes will find it’s a sucker’s bet.”

Hustling customers for tips isn’t as bad a problem as it was during the boom years, said Jeff Voyles, a casino management professor at UNLV.

Employees may soon revert to old habits if clubs aren’t proactive, however.

IRS audits are rare and owners have always had a difficult time tracking the flow of tips through their clubs, he added.

“Turnover is high in these clubs, which means new faces and ways of doing things. It’s a never-ending task.”