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National Restaurant Association - IRS grants more time for some businesses to comply with service-charge reporting rule

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IRS grants more time for some businesses to comply with service-charge reporting rule

The IRS has given some businesses an extra year to comply with the agency's updated policy on tips and service charges.

The IRS last June issued Revenue Ruling 2012-18 to clarify and update the treatment of gratuity payments -- specifically, to delineate when such payments should be treated as tips versus service charges. The ruling reiterated four long-standing IRS criteria that suggest when a payment counts as a tip rather than a service charge. The absence of any of these factors indicates the gratuity may be a service charge, the IRS said:

(1) the payment must be made free from compulsion;
(2) the customer must have the unrestricted right to determine the amount;
(3) the payment should not be the subject of negotiation or dictated by employer policy; and
(4) generally, the customer has the right to determine who receives the payment. All of the surrounding facts and circumstances must be considered.

The IRS simultaneously sent guidance to its examiners on the updated policy, notifying them to begin enforcing the policy immediately (as of June 25, 2012) and retroactively. The only exception, the IRS said, was in the limited cases where a business's existing systems and practices must be updated in order to comply. In these cases, the IRS said field examiners should enforce the updated policy prospectively, starting Jan. 1, 2013.

In response to comments, the agency Dec. 13 issued Announcement 2012-50 to give those businesses an extra year -- until Jan. 1, 2014 -- to comply. Again, the exception applies only to businesses that need to update their existing systems and practices to comply. The exception applies narrowly, involving very limited facts and circumstances, the IRS reiterated.

For all other businesses, IRS enforcement of the policy remains effective immediately and applies retroactively.

The NRA conducted a webinar for its members in October on the updated policy. Access the archived webinar with your member login.

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