News From the IRS Tip Wars

by Robert Wagner, CPA

Beginning October, 1995 the Atlanta District of the Internal Revenue Service (IRS) renewed its assault on Georgia restaurants, bars and hotels. Leading the assault are a dozen revenue agents based in the IRS’s Atlanta District office.

The IRS’s objective is unconditional surrender. Restaurants, bars and hotels are being asked to participate in IRS’s tip reporting program. Establishments are given three choices when the revenue agent arrives. Either

1. sign the TRDA (Tip Rate Determination Agreement),
2. sign the TRAC (Tip Reporting Alternative Commitment) or
3. submit to an exhausting tip audit.

The third choice, the tip audit, is the “scorched earth” option. A tip audit subjects both employer and employees to audit on unreported tip income back as far as 1988 and should be avoided. The only realistic options are the 1) TRDA and 2) TRAC agreements. Refusing to participate in the tip program will land you in a tip audit.

The IRS reports that over 90% of Georgia restaurants approached by the IRS are signing the TRAC. Nationally 6,200 locations have signed up for TRAC. Here’s why:

• TRAC was developed by the hospitality industry as a workable alternative to the TRDA.
• TRAC does not require employees to sign a tip reporting agreement. TRDA does.
• TRAC does not require employees to report tips at certain rates. TRDA does.
• TRAC does not result in an IRS audit of a prior 6 month period. TRDA does.
• TRAC does not result in a notice and demand for back taxes. TRDA usually does.

Little wonder that food and beverage establishments are selecting TRAC. But TRAC does require that:

• The employer must educate new hires and existing employees about tip reporting on at least on a quarterly basis and
• The employer must track employee tips.

TRDA Compliance Letters

In 1994 (before TRAC existed) over 100 Georgia restaurants signed up for the TRDA. In January, 1996 the IRS Atlanta District commenced its first review of taxpayers who signed the TRDA. Letters went to all taxpayers that signed TRDA. The IRS asked for:

1. Copies of employee tip agreements,
2. Total sales by quarter subject to tipping,
3. Total tips by quarter reported and
4. The 1994 Form 8027 (sales and tip report).

If you signed the TRDA, you will be contacted by the IRS. While the request for records is a pain, take heart that the IRS is not just trying to collect yet more taxes. The IRS has no clue whether the TRDA is resulting in higher tip rates as it is supposed to do. So the IRS is looking at taxpayer records.

Here are some frequently asked questions about these IRS letters:

The IRS letter asks for records to be produced in 30 days. Can we get an extension?

Probably. Promptly write the IRS that you need an extension and for how long. If your request is reasonable, it will probably be honored.

What if we have not filed Form 8027?

File a delinquent one.

We agreed to one tip rate but we reported less. Are we in trouble?

Perhaps not. The IRS is looking at your tip reporting trend. If you show that your tip rate (the percentage of tips to sales) is increasing you should be OK.

Our trend in tip reporting is unchanged or got worse since signing the TRDA. Are we in trouble?

You may be given a probationary period by the IRS. For example, the IRS may ask to see your records again in 6 months to determine whether you have improved your tip rate.

Can we switch from the TRDA to the TRAC agreement?

Generally, you can switch to TRAC upon request. But if you received a TRDA letter, the IRS wants to see your sales and tip data before letting you switch to TRAC. If your tip rate is improving, you can switch. If your tip rate is deteriorating, you may have to first show an improvement before switching.

It’s important to remember that the IRS is as new to these tip reporting agreements as you are. Therefore, you have some wriggle room to negotiate. Don’t hesitate to make a reasonable offer to the IRS. It just might be accepted.

Robert Wagner is a principal in Robert Wagner & Company, LLC, CPAs. The firm provides tax and accounting services to restaurants, bars and hotels. He can be reached at 404-874-7000, fax 404-874-1132, email: rwagner@bellsouth.net.