IRS Introduces Employer-Designed Tip Reporting Program for Food and Beverage Industry

The IRS's Tip Rate Determination/Education Program (TRD/EP) is designed to increase tax compliance in industries in which tipping is common. Under that program, employers may enter into a Tip Rate Determination Agreement (TRDA) or a Tip Reporting Alternative Commitment (TRAC) agreement. TRDAs require the determination of tip rates, while TRAC agreements emphasize education and tip reporting procedures.

Currently, the food and beverage industry uses both TRDAs and TRAC agreements. Because employers in that industry have expressed interest in designing their own TRAC programs, the Service developed the Employer-designed Tip Reporting Program for the Food and Beverage Industry (EmTRAC program).

The EmTRAC program outlines the requirements that employers in the food and beverage industry must satisfy to obtain approval for their individual programs. It also includes the procedures for requesting program approval.

The Service notes that the EmTRAC program retains many of the provisions contained in the TRAC agreements, such the establishment of educational programs and tip reporting procedures. Under the new program, however, employers have considerable latitude in designing their educational program and tip reporting procedures and may combine them.

The Service advises that it may terminate all EmTRAC programs at any time following a significant statutory change in the FICA taxation of tips. After May 31, 2005, it also may terminate prospectively the TRD/EP and all EmTRAC programs.

The Service invites comments on the EmTRAC program. In particular, it seeks comments on whether electronic tip reporting systems, other than the point-of-sale system, would meet the educational requirements.

Employers interested in commenting on the EmTRAC program should submit their comments to Office of Specialty Taxes, c/o CC:DOM:CORP:R (Notice 2000-21), room 5226, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Comments are due by July 7, 2000.

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 hairstyling 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. This notice sets forth the requirements employers must meet and the procedures for obtaining approval of their individual programs. Because the basic premise of the employer-designed program is similar to the TRAC program, the employer-designed program is designated the EmTRAC program. The Service believes that employers that have already developed their own educational programs and tip reporting procedures will find that the EmTRAC program meets their needs.

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 agreements. 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 employer has considerable latitude in designing its educational program and tip reporting procedures and may combine them. For example, a point-of-sale tip reporting system would 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 only if --

1. the Service determines that the employer has failed to

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 employers must use to request approval of their 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 tips coordinator in any local IRS office or by calling (202 622-4177 (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 tips 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 May 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 will be submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act (44 U.S.C. 3507).

[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 (used for reporting requirements only) 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. COMMENTS

[28] The IRS invites interested persons to comment on the EmTRAC program. In particular, the Service requests comments from the industry regarding whether electronic tip reporting systems, other than the point-of-sale system, would also meet the educational requirement.

[29] Written comments must be received by July 7, 2000. Send submissions to Office of Specialty Taxes, c/o CC:DOM:CORP:R (Notice 2000-21), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: Specialty Taxes, c/o CC:DOM:CORP:R (Notice 2000-21), Courier's desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the "Tax Regs" option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.ustreas.gov/tax_regs/regslist.html.

DRAFTING INFORMATION

[30] The principal author of this notice is Karin Loverud of the Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding this announcement, contact Ida Volz of the Office of Specialty Taxes on (202) 622-4177 (not a toll-free call).

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Letter -- Request for EmTRAC approval