Where did you get the notion that tips are supposed to be untaxed income?
Frankly tax fraud from people working for tips in the service sector should be among the very least of our worries as a society.
Above? Not so much.
A lot of wait staff seem content to push mis-information: "If you tip poorly, the IRS makes us pay tax on it anyway, i.e. we're having to pay to serve you!"
No, the IRS makes an estimate on how much tipped workers are paid. If you document and it's less, then you pay tax on that. But using the IRS as the big bad wolf to get more tips that you know damn sure you're not going to report, doesn't make me the most sympathetic.
I've seen wait staff say that they believe 20% should be a baseline, for bad service, 25 for "decent" and 30% for good service...
Not quite the same, but perhaps it's a quid pro quo, of sorts. "Ups and downs in the economy, we won't come after you for earnings above the flat rate, but you will pay when lower". Which does negate my point, but such an agreement is consensual.
It doesn't seem to me that the IRS could just make "deals" with individual restaurants since congress has to actually legislate the internal revenue code. But I don't see anything when I search for what you describe.
where does this insanity stop? 50%? 100%? No matter how much you tip, people will grow to expect it as baseline, and then some more