IRS Proposes New Voluntary Tip Reporting Program for Service Industry Employers

(Parker Tax Publishing March 2023)

The IRS issued a proposed revenue procedure establishing the Service Industry Tip Compliance Agreement (SITCA) program, a voluntary tip reporting program between the IRS and employers in the service industry (excluding the gaming industry) that is designed to enhance tax compliance through the use of agreements instead of traditional audit techniques. The SITCA program is intended to replace the Tip Rate Determination Agreement (TRDA) program and the Tip Reporting Alternative Commitment (TRAC) program as set forth in Announcement 2001-1 and replace the Employer-Designed Tip Reporting Program (EmTRAC) as set forth in Notice 2001-1. Notice 2023-13.

Background

The Tip Reporting Determination/Education Program (TRD/EP) was designed by the IRS to enhance tax compliance through educational programs and the use of voluntary tip reporting agreements instead of traditional audit techniques. Since 1995, TRD/EP has offered employers in the food and beverage industry the opportunity to enter into Tip Reporting Alternative Commitment (TRAC) agreements. In general, TRAC agreements require employers to establish an educational program for tipped employees and tip reporting procedures for cash and charged tips. In 1996, TRD/EP began offering employers in certain other industries the opportunity to enter into TRAC agreements and introduced the Tip Rate Determination Agreement (TRDA) program, which is available to employers in a variety of tipping industries and requires the determination of minimum tip rates based on occupational categories that employees must use to report tips to the employer. The decision to enter into a TRAC or TRDA agreement has always been voluntary.

In 2000, the IRS published a series of announcements requesting comments on proposed new and revised TRAC agreements and TRDAs for various industries. Under the TRDA program, the IRS and the employer work together to arrive at a tip rate for the employer's various occupational categories, and employees enter into Tipped Employee Participation Agreements (TEPAs) with their employers to report tips at the agreed upon tip rates. The TRAC agreements employers to (1) implement educational programs for their employees for reporting tips and (2) establish a procedure under which a written or electronic statement is prepared and processed on a regular basis (no less frequently than monthly), reflecting all tips for services attributable to each employee. The IRS also published Notice 2000-21, which set forth the requirements employers in the food and beverage industry must meet to participate in the new Employer-Designed Tip Reporting Program (EmTRAC) program. The EmTRAC program is similar to the TRAC program but was created for employers that wish to submit their own educational programs and tip reporting procedures for approval by the IRS.

Those proposed TRAC, TRDA, and EmTRAC programs all provided a commitment that the IRS would provide protection to the employer from FICA tax liability under Code Sec. 3121(q) by not initiating any tip examinations of the employer for periods in which the agreements were in effect. The proposed TRDAs included a similar commitment for employers with respect to their employees who reported tips at or above the tip rate established for the employee. TRAC agreements did not specifically provide tip examination protection for employees, but the IRS stated, in the series of announcements concerning the TRAC program that were published in 2000, that employees who properly report tips would not be subject to challenge by the IRS. Notice 2000-21 was silent as to the tip examination impact on employees in the EmTRAC program.

In 2001, the IRS issued Announcement 2001-1, which finalized pro forma TRAC and TRDA agreements described in Announcements 2000-19 through 2000-23, and provided that the final versions would be available on {{http://www.irs.gov }}{. In addition, the IRS issued Notice 2001-1 to supersede Notice 2000-21 and make several non-substantive clarifying changes to the EmTRAC program. The TRAC, TRDA, and EmTRAC programs have continued largely unchanged and have had substantial participation. The TRAC agreements and TRDAs currently available on the Small Business/Self-Employed (SB/SE) Division webpage on {{http://www.irs.gov }}{ are similar to the agreements proposed in the series of announcements from 2000 and 2001. The EmTRAC program currently available on the SB/SE Division webpage on {{www.irs.gov }}{ is the program described in Notice 2001-1.

In Announcement 2013-29, the IRS solicited comments on all aspects of TRACs and TRDAs and on ways to improve tip reporting compliance and utilize technological advancements to decrease the administrative burden on taxpayers and the IRS. Comments received by the IRS encouraged the use of a point-of-sale system (POS System) to track and improve tip reporting for both directly and indirectly tipped employees and requested that any changes to tip reporting compliance programs provide added flexibility to cover a wide range of business models. Commenters requested that any new agreement include incentives for employee participation and clarify when the IRS may retroactively revoke a tip reporting agreement. Some commenters suggested that minimum tip rates should be established, and that consolidated reporting be available for all establishments located in the same facility. Commenters also requested that any new agreement be released with an additional opportunity for public comment.

Notice 2023-13

On February 3, the IRS provided a proposed revenue procedure in Notice 2023-13 which describes the Service Industry Tip Compliance Agreement SITCA program, a new voluntary tip reporting program being proposed by the National Tip Reporting Compliance Program (NTRCP) to replace the TRAC, TRDA, and EmTRAC programs. NTRCP is part of the Small Business/Self-Employed Division of the IRS.

Under the proposed revenue procedure, the SITCA program is available to employers in all service industries (excluding gaming industry employers) with at least one business location, called a "Covered Establishment," operating under the Employer Identification Number (EIN) of the employer. The SITCA program is designed to take advantage of advancements in POS 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. After acceptance into the SITCA program, an employer must annually establish that each of its participating Covered Establishments satisfies a minimum reported tips requirement with respect to its tipped employees in order for that Covered Establishment to continue with the program into the next year. If the employer cannot establish that a Covered Establishment meets this requirement with respect to a calendar year, the Covered Establishment will be removed from the program retroactively to the beginning of that calendar year and will not be eligible to participate in the SITCA program again for the immediately succeeding three completed calendar years or as otherwise provided by the IRS.

Similar to the TRAC, TRDA, and EmTRAC programs, the proposed SITCA program will provide accepted employers with protection from Code Sec. 3121(q) liability with respect to their Covered Establishments that remain in compliance with the program unless the liability is based on (1) tips received by a tipped employee where the asserted liability is based upon the final results of an audit or agreement of the tipped employee, or (2) the reporting of additional tip income by a tipped employee. The protection from Code Sec. 3121(q) liability applies only to Service Industry Employers with Covered Establishments for the periods for which they have been approved to participate in the SITCA program. It does not apply to Service Industry Employers to the extent they have Covered Establishments that have been removed from the SITCA program, for the period of time between a Covered Establishment's removal and reinstatement (if applicable), or to the extent a Service Industry Employer has other business locations, either with tipped employees or without, that are not approved to participate in the SITCA program.

The proposed revenue procedure requires Service Industry Employers to demonstrate compliance with the SITCA program by submitting an annual report on behalf of each Covered Establishment after the close of the calendar year. If the Service Industry Employer cannot establish that a Covered Establishment satisfied the minimum reported tips requirements in its annual report, the Service Industry Employer will not receive protection from liability under Code Sec. 3121(q) with respect to that Covered Establishment for the calendar year to which the annual report applies and that Covered Establishment will be removed from the SITCA program. Once a Covered Establishment is removed from the SITCA program, it is generally eligible for reinstatement only after the Service Industry Employer can establish that it has satisfied the minimum reported tips requirement with respect to that Covered Establishment for three completed calendar years.

The proposed SITCA program streamlines both compliance with and enforcement of tip reporting requirements by eliminating employee participation and the corresponding employee tip income audit protection and providing for automatic removal of a Covered Establishment that fails to satisfy SITCA's minimum reported tip requirement in its annual report. Unlike the GITCA and TRDA programs, the proposed SITCA program does not require any tax reporting commitment from employees. Employees are not required to report tips at an hourly rate, nor are employers required to provide educational or tip reporting training programs to their employees as is the case in the TRAC program. Employees have a responsibility to report actual tips received pursuant to Code Sec. 6053(a), but employees do not sign participation agreements or otherwise agree to be monitored for compliance by their employers.

The SITCA program is intended to serve as the sole tip reporting compliance program for employers in all service industries (excluding gaming industry employers). The proposed revenue procedure provides that for employers with existing agreements in the TRAC, TRDA and EmTRAC programs, there will be a transition period during which the existing agreements will remain in effect. The transition period will end upon the earliest of (1) the employer's acceptance into the SITCA program; (2) an IRS determination the employer is noncompliant with the terms of the TRAC, TRDA, or EmTRAC agreement; or (3) the end of the first calendar year beginning after the date on which the final revenue procedure is published in the Internal Revenue Bulletin (IRB). Employers participating in the TRAC, TRDA, and EmTRAC programs at the time the final revenue procedure is published in the IRB will continue to have protection from Code Sec. 3121(q) liability to the extent they are compliant with their existing tip reporting agreements prior to termination. Employees who have been receiving protection from tip income examination through their employer's participation in an existing TRAC, TRDA, or EmTRAC agreement will also continue to receive that protection for the return periods covered by their employer's agreement (including during the transition period) to the extent their employers remain compliant with the terms of their agreement.

For a discussion of IRS tip compliance programs, see Parker Tax ¶ 124,135.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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