April 26, 2000
IRS Expands, Simplifies Its
Tip Income Compliance Agreements
WASHINGTON - The Internal Revenue Service announced today that it
is simplifying its voluntary tip income compliance agreements and expanding
them to all industries where tipping is customary. Also, IRS will now allow
employers in the food and beverage industry to design their own agreements.
Finally, the IRS will resume enhanced enforcement efforts in cases of serious
noncompliance at businesses where tipping is customary.
Under TRDA (Tip Rate Determination Agreement), the IRS and the
employer work together to determine the amount of tips that employees
generally receive and should report. Under TRAC (Tip Reporting Alternative
Commitment), the employer agrees to educate employees and establish tip
reporting procedures. In return for taking part in TRDA or TRAC, IRS agrees not
to initiate tip examinations of the employer while the agreement is in effect.
These agreements are designed to help employers and employees understand
and meet their tip income reporting responsibilities.
Until now, only the gaming, food and beverage, cosmetology and barber
industries were able to make these agreements with the IRS. The IRS has
simplified and shortened the TRDA and TRAC for the food and beverage
industry and the TRAC for the cosmetology and barber industry. In addition, the
latter agreement will now allow business owners with booth renters or
independent contractors to participate.
In another new development, the IRS has now developed a TRDA and a
TRAC for other industries where tipping is customary. Employers that can
participate include taxicab and limousine companies, airport skycap companies
and car wash operations.
The updated agreements were released today in Announcements
2000-19 through 2000-23.
In addition to TRDA and TRAC, the IRS will now permit employers in the
food and beverage industry to design their own program through EmTRAC
(Employer’s Tip Reporting Alternative Commitment). This is in lieu of the IRS
developed TRAC. EmTRAC will include the same employer commitments and
protections as afforded under the TRAC agreement. This option is now being
offered to food and beverage employers. Later, the IRS will consider expanding
this option to other industries. This option will allow these employers the
flexibility to develop a program that would best serve their needs.
Notice 2000-21, also released today, gives employers in this industry
information on developing their own plans.
“These changes reflect the IRS’s continued effort to use education and
outreach to help taxpayers voluntarily comply with the nation’s tax laws rather
than solely relying on enforcement actions,” IRS Commissioner Charles O.
Rossotti said. “We are very pleased with the cooperative efforts of participating
businesses that make these agreements work so well.”
The IRS will accept public comments for 60 days on these changes or on
other aspects of this program that will help to further improve voluntary
compliance. Announcements 2000-19 through 2000-23 will be published in
Internal Revenue Bulletin 2000-19, dated May 8, 2000. Notice 2000-21 will
appear in the same Bulletin.
The IRS also announced today that when there are flagrant violations of
the tip reporting rules, effective October 1, 2000, it will resume tip examinations
and assessments for FICA taxes on employers only, without first determining the
tip income of individual employees.
IRS has had a self-imposed moratorium on making such assessments
while the courts have been deciding this issue. However, three Federal Circuit
Courts of Appeal have now clearly found that IRS does have the authority to
assess employer FICA taxes on tip income without first examining the tip records
of individual employees. The IRS will make employer-only FICA tax
assessments only in the most extreme cases of noncompliance.
“Many people are willing to comply with their responsibilities for correctly
reporting tip income, and we have set forth a non-burdensome method for them
to comply,” Rossotti said. “However, there are still some people who are
flagrantly willing to throw the burden on other taxpayers. We will use the power
that the courts have given us to make sure that they don’t unfairly burden their
IRS will also continue to examine the tips received by individual
employees as appropriate. Tipped employees should make sure they keep good
records to support the actual tips received.
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