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National Restaurant Association - NRA files comments with IRS on tip agreements

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NRA files comments with IRS on tip agreements

As the Internal Revenue Service looks at revising its voluntary tip agreements to improve tip-reporting rates in restaurants, the National Restaurant Association is urging the agency to simplify the agreements and provide employers and employees with greater protection from audits.

Some of the tip agreements – the IRS currently offers four -- are now 20 years old. The IRS announced this spring it’s looking into revisions across the board, especially to the Tip Reporting Alternative Commitment (TRAC) and Tip Rate Determination Agreement (TRDA). Thousands of restaurants have signed these agreements, but the agency maintains tip income remains significantly under-reported.

Restaurant employers who enter an IRS agreement generally agree to take on a bigger role in educating employees about tip reporting and taking steps to ensure more accurate employee tip reporting.

The IRS has a heavy stick to encourage restaurants to participate. Restaurants owe FICA payroll taxes on all tips, whether reported or not, and the IRS maintains it has the right to look at a restaurant’s tip-related paperwork, use a formula to assess the aggregate amount of unreported tip income, and hand the employer an assessment for unpaid FICA taxes on unreported tips. This saves the IRS the hassle of doing time-consuming employee audits to determine which employees actually failed to report all their income, and by what amount.

If an employer signs a tip agreement, however, the IRS generally agrees not to conduct these “employer-only” or “employer-first” tip audits for the time a restaurant is operating under an agreement.

In comments submitted to the IRS Aug. 22, the NRA asked the IRS to consider some changes:

  • Add more explicit protections for employers: The NRA has for years asked the IRS to protect employers who participate in tip agreements from “employer-only” audits and assessments for FICA taxes on unreported tips not just during the time the employer operates under the agreement, but for prior years too. (Note: The IRS has the right at any time to bill employers for FICA taxes on unreported tips in cases where the agency has determined through an audit that an individual employee failed to report all their income, or where an employee files a Form 4137 to report previous unreported tips.)
  • Incentivize employees: The NRA asked the IRS to look at more tools to incentivize employees to fully report tips. One suggestion: Protect employees who participate in tip agreements from tip audits. “Such protections will likely prove to be powerful incentives for employees to join any new tip-reporting program and to report all their tips,” the NRA noted in its comments.
  • Clearly specify when a tip agreement can be revoked: The IRS has the right to revoke TRDA and TRAC tip agreements for a number of reasons, including if the agency thinks tip reporting rates are still too low. The NRA asked the IRS to offer “due process” hearings for employers before it revokes an agreement, and give employers a way to correct problems.
  • Make it easier for employers to sign agreements: Many restaurant companies prefer to enter tip agreements on an establishment-by-establishment basis, rather than signing up all company units at once. The IRS should continue to allow this, the NRA said. The NRA also asked the IRS to streamline the process so electronic registration and verification can serve as proof that an employer has entered into an agreement.

Read the NRA’s letter to the IRS.

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