The IRS, trying to get its arms around a problem that results in an estimated $1.66 billion in unreported tip income annually, issued a proposed revenue procedure in Notice 2023-13, saying it intends to create a new voluntary process for service industry employers to track tips.
The Service Industry Tip Compliance Agreement (SITCA) that the IRS announced Monday would replace three other tip reporting programs: the Tip Reporting Alternative Commitment (TRAC) program and the Tip Rate Determination Agreement (TRDA) program, explained in Announcement 2001-1; and the Employer-Designed Tip Reporting Program (EmTRAC), explained in Notice 2001-1.
SITCA is intended to serve as the sole tip reporting compliance program for employers in all service industries other than gaming, the IRS said.
"The SITCA program is designed to take advantage of advancements in POS [point-of-sale] systems and time and attendance systems, as well as the use of electronic payment settlement methods to improve tip reporting compliance and to decrease taxpayer and IRS administrative burden," the IRS said in the notice.
As with the previous programs, accepted employers mostly will be protected from Sec. 3121(q) liability, with two exceptions: if the liability is based upon (1) the final results of an audit or agreement of a tipped employee or (2) the reporting of additional income by a tipped employee.
Service industry employer compliance is measured, in part, by meeting a minimum reported tips requirement with respect to total tips reported for a calendar year by tipped employees at each covered establishment, the IRS said. To meet this requirement, the tips reported by tipped employees at each covered establishment must meet or exceed the sum of (1) all charge tips, as established by the covered establishment's POS system, plus (2) an estimation of all cash tips calculated using charge tips and other data from the POS system and applying a minimum charge tip rate, as well as applying discount rates for both stiffing and the differential between cash and charge tipping (the IRS says cash tipping is typically lower).
Interest in the IRS tipping program dates to at least 2018 when a study by the Treasury Inspector General for Tax Administration (TIGTA) concluded that the IRS was providing tip income audit protection to potentially noncompliant employers and employees. TIGTA determined that unreported tips for the 2016 tax year totaled about $1.66 billion.
One problem TIGTA found was that the IRS rarely revoked tip reporting agreements, allowing employers and some employees to maintain tip income audit protection even though they were noncompliant.
In response, the SITCA program eliminates employee participation — and, therefore, the audit protection — and automatically removes the protection of a covered establishment that does not meet the program's minimum tip requirement in its annual report.
Because covered establishments that do not meet the minimum reported tips requirement will be automatically removed from SITCA, the IRS and Treasury believe the program will provide "employers with an incentive to train, educate, and implement procedures for employees to provide an accurate report of all tips received. More accurate tip reporting also benefits employees upon audit and can result in higher Social Security wages credited to them upon retirement."
The IRS is accepting comments until May 7.
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.