IRS Revises EmTRAC Program for Food & Beverage Industry

Notice 2001-1 supercedes Notice 2000-21, 2000-19 IRB 967. (For a summary of Notice 2000-21, see Tax Notes, May 1, 2000, p. 625; for the full text, see Doc 2000-11913 (12 original pages); 2000 TNT 82-8 , or H&D, Apr. 27, 2000, p. 887.

Employer-designed Tip Reporting Program for the Food and Beverage Industry

I. BACKGROUND

[1] In 1993, the Internal Revenue Service introduced its Tip Rate Determination/Education Program (TRD/EP), which is designed to enhance tax compliance among tipped employees through taxpayer education and voluntary advance agreements instead of traditional audit techniques. The TRD/EP was developed as a means of enhancing tax compliance while reducing taxpayer burden. In essence, the TRD/EP envisions that the Service and taxpayers in industries in which tipping is common will work together to improve tax compliance.

[2] The TRD/EP currently offers employers the opportunity of entering into one of two types of agreements. The Tip Rate Determination Agreement (TRDA) requires the determination of tip rates; the Tip Reporting Alternative Commitment (TRAC) agreement emphasizes education and tip reporting procedures. The agreements also set forth an understanding that both the employer and employees who comply with the terms of the agreement will not be subject to challenge by the Service. The decision to enter into either a TRDA or a TRAC agreement is entirely voluntary on the part of the employer.

[3] TRDAs are currently in use in the food and beverage industry and the gaming industry. TRAC agreements are currently in use in the food and beverage industry and the cosmetology and barber industry. The Service expects to begin making these agreements available to other industries during 2000.

[4] Taxpayers in the food and beverage industry have expressed interest in designing their own TRAC programs. Notice 2000-21, 2000- 19 I.R.B. 967, set forth proposed requirements and procedures for obtaining approval of an employer-designed EmTRAC program. Notice 2000-21 also offered interested persons the opportunity to comment on the proposed program. The Service received no comments. Even so, several nonsubstantive clarifying changes have been made. They appear in this document.

II. EmTRAC PROGRAM

[5] The EmTRAC program is available only to employers in the food and beverage industry that have employees who receive both cash and charged tips. The employer may have one place of business or many places of business. For purposes of the program, each place of business is called an establishment. If an employer has more than one establishment, it can choose which establishments to include in its EmTRAC program.

[6] The EmTRAC program retains many of the provisions in the TRAC agreement. The employer must establish an educational program that trains employees that the law requires them to report all their cash and charged tips to their employer. Education must be furnished for newly hired employees and quarterly for existing employees.

[7] The employer must establish tip reporting procedures, 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.

[8] The EmTRAC program provides an employer with considerable latitude in designing its educational program and tip reporting procedures, which the employer may combine. For example, a point-of- sale tip reporting system could meet both of these requirements, because the employee is prompted of the tip reporting requirement at the end of each sale and because the reporting occurs at the end of each sale.

[9] The employer must agree:

1. to comply with the requirements for filing all required

[12] The effective date of an EmTRAC program is the first day of the quarter beginning on or after the date the Service signs an approval letter.

[13] An employer may at any time terminate its EmTRAC program either completely or with respect to one or more establishments. The Service may terminate its approval with respect to the EmTRAC program or a specific establishment or establishments, only if:

1. the Service determines that the employer or

[14] If the employer has an existing TRAC agreement or TRDA covering one or more establishments included in the employer's EmTRAC program, the existing TRAC agreement or TRDA will terminate with respect to that establishment or those establishments upon the approval of the employer's EmTRAC program.

III. PROCEDURES FOR REQUESTING APPROVAL

[15] The employer must request approval of its EmTRAC program. For this purpose, the Service has developed a pro forma letter that an employer must use to request approval of its EmTRAC program. The letter requests approval of the employer's EmTRAC program and states that the employer will comply with the provisions set forth in the letter (and also set forth in section II above).

[16] A copy of the approval request letter is attached to this notice. It can be obtained by mail by contacting the tip coordinator in any local IRS office or by calling (202) 622-5532 (not a toll-free call).

[17] The completed approval request letter and a copy of the employer's EmTRAC program should be sent to:

Internal Revenue Service

[18] After it receives the approval request letter, the Service will review the employer's program. If the program meets the necessary requirements, the Service will send the employer an approval letter, a copy of which is attached to this notice. The approval letter will specify the effective date of the employer's EmTRAC program.

[19] If the IRS determines that the employer's EmTRAC program fails to meet all the requirements, the IRS will contact the employer and offer assistance in working out a program that will meet both the employer's needs and the IRS's requirements.

V. MISCELLANEOUS

[20] Upon request to the local tip coordinator or the EmTRAC Coordinator, the Service will assist any employer in establishing, maintaining, or improving its educational program or tip reporting procedures.

[21] The Commissioner of Internal Revenue may terminate all EmTRAC programs at any time following a significant statutory change in the FICA taxation of tips. After December 31, 2005, the Commissioner may terminate prospectively the Tip Rate Determination/Education Program and all EmTRAC programs.

VI. PAPERWORK REDUCTION ACT

[22] The collections of information contained in this notice have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1716.

[23] An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number. The collections of information in this document are in sections II and III. This information is required to comply with sections 6053(a) and 6001 of the Internal Revenue Code and to assist the Internal Revenue Service in its compliance efforts. This information will be used to monitor the Employer's performance under its EmTRAC program. The collections of information are required to obtain the benefits available under the EmTRAC program. The likely respondents are business or other for-profit institutions.

[24] The estimated total annual reporting and/or recordkeeping burden is 870 hours.

[25] The estimated annual burden per respondent/recordkeeper varies from 8 hours to 44 hours, depending on individual circumstances, with an estimated average of 13 hours. The estimated number of respondents and/or recordkeepers is 20.

[26] The estimated annual frequency of responses is on occasion.

[27] Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103 of the Code.

VII. AFFECT ON OTHER DOCUMENTS

[28] Notice 2000-21 is superseded.

DRAFTING INFORMATION

[29] The principal author of this notice is Karin Loverud of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this announcement, contact Ida Volz of the Office of Compliance Policy on (202) 622-5532 (not a toll-free call).

LETTER -- REQUEST FOR EMTRAC APPROVAL