The Last Word: A Significant Victory — But the Fight Continues (Restaurants USA, January/February 2000)

The Last Word: A Significant Victory — But the Fight Continues

Restaurants USA magazine's final issue was published in September 2002 but these archived articles remain available for our readers' convenience.

By Steven C. Anderson, CAE, President and Chief Executive Officer, National Restaurant Association

January/February 2000 — After a lengthy fight, the National Restaurant Association recently achieved a major and significant victory for the restaurant industry when the Internal Revenue Service (IRS) announced revisions to its enforcement of the Tip Reporting Alternative Commitment (TRAC) agreement.

The October 1999 announcement by the IRS was welcome news for restaurateurs who participate in the TRAC program and for the National Restaurant Association, which has made this issue a priority. The revisions will better protect restaurateurs who are in compliance with TRAC, even if employee tip reporting at their operations remains low. Restaurateurs should not be vulnerable to being kicked off the TRAC program when they are in full compliance.

Under TRAC, employers agree to advise their workers of tip-reporting requirements; to implement procedures by which employees report received tips; comply with tax reporting, filing and payment requirements; and to maintain specific tax records. The recent revisions reflect the agency’s acceptance of the Association’s proposal to eliminate provisions that allow the IRS to terminate the agreement if employees still do not increase their tip reporting to a level it believes appropriate — even if the employer fully complies with TRAC. In the past, termination of a TRAC agreement meant an employer became immediately exposed to employer-only Federal Insurance Contribution Act (FICA) tax assessments by the IRS on suspected unreported tips. Now, because of persistent prompting by the Association, the IRS will focus on ensuring that employees fully disclose their tips.

The IRS also announced that it will charge local offices with enforcement oversight. If a multiple-location restaurant company operates in different localities, the IRS office in the district of the chain’s headquarters has oversight responsibilities. Many multiunit operators have complained to the National Restaurant Association that they should not have to deal with more than one district office, so this is more good news.

Finally, the IRS also said that it will extend the TRAC agreement for five years beyond its scheduled expiration date of May 31, 2000.

Although the IRS’s decision is a huge victory for Association members and the restaurant industry as a whole, the battle for fairness continues. The agency still wants restaurateurs to be the "tip police," checking up on their employees’ tip-reporting practices. It is the responsibility of the IRS — not the restaurant operator — to pursue unreported employee tips. By holding employers liable when workers fail to report tips, the agency has put restaurant operators in an untenable position.

As a result, the National Restaurant Association has filed briefs in three different cases on behalf of restaurants involving employer-only audits and assessments of FICA taxes on tips. The most recent amicus curiae brief was filed in the U.S. Court of Appeals for the Eleventh Circuit in Atlanta.

The Association maintains that penalizing employers only — without first determining which employees underreported tips and without applying the assessment to the proper employees’ Social Security accounts — is unfair. The practice is also contrary to Congress’ intent when it changed the tax law in 1988 to require employers to pay FICA taxes on all tips. In addition to the fight to protect the industry from employer-only assessments in the courts, the Association continues to pursue a legislative solution to prohibit employer-only assessments.

Although the IRS’s TRAC decision was a good one for the restaurant industry, the National Restaurant Association will continue the fight until the issue has been fully resolved.

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