IRS Issues New Tip Reporting Revenue Procedure

Employee Benefits Alert
07.28.06

Earlier today, the IRS released Rev. Proc. 2006-30, which establishes a pilot program as a new reporting alternative for employers in the food and beverage industry. The IRS hopes that the program, designated the Alternative Tip Income Program (“ATIP”), will promote tip reporting compliance, reduce disputes on audit, and reduce filing and recordkeeping burdens. ATIP becomes available on a calendar year basis to qualifying food and beverage establishments for each of the three years beginning on or after January 1, 2007.

Different from other existing tip reporting programs (e.g., Tip Rate Determination Agreement (“TRDA”), Tip Reporting Alternative Commitment (“TRAC”), Employer-designated Tip Reporting Alternative Commitment (“EmTRAC”), etc.), ATIP does not require an employer to enter into an individual agreement with the IRS. Further, employers currently participating in an existing program may elect to switch to ATIP provided the employer satisfies the requirements set forth in the revenue procedure. Such an election constitutes a revocation of any existing tip compliance agreements between the establishment and the IRS.

Employers participate in ATIP on an establishment-by-establishment basis and must qualify annually to continue in the program. To qualify for participation in ATIP, 20 percent of a food and beverage establishment’s gross receipts must have been attributable to charge receipts. Further, at least 75 percent of the establishment’s tipped employees must agree to participate as of the last day of the first payroll period ending on or after January 1 of the calendar year, and each employee must execute an employee participation agreement. A participating establishment must also make a good faith effort to maintain the 75 percent participation rate throughout the year.

The ATIP rules focus on the food and beverage establishment’s charged tip reporting rate from the prior year’s Form 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips) to establish a “formula tip rate,” which is equal to the preceding year’s charged tip rate from the Form 8027 less two percentage points. The establishment uses the formula tip rate to compute total deemed tips for the applicable period by multiplying the establishment’s total gross receipts for the applicable period by the formula tip rate. The total deemed tips are then attributed to all tipped employees, although only participating tipped employees must generally report the attributed tips as wages. Tips attributed to nonparticipating employees are not treated as reported tips to the establishment. The nonparticipating employees must report the tips actually received as under the current rules. Participating employees may opt out of the ATIP calculation by reporting their actual tips received to the establishment for that period. Presumably, this would occur only if the participating employees actual tips were lower than the attributed tips.

Benefits applicable to participation in ATIP include the following:

  • The IRS will not initiate any tip examinations for any period during which the establishment participates.
  • Any section 3121(q) notice and demand of a participating establishment will be issued only in connection with the reporting of additional tip income by a participating employee.
  • The IRS will consider a participating establishment as in compliance with the reporting requirements of sections 6053(c)(2) and (3) of the Code regarding allocation of tips to participating employees for the taxable periods during which the employer’s participation in ATIP remains in effect.
  • The IRS will not examine a participating employee’s tip income provided the employee reports at least the amount of attributed tip income from the establishment (as reported on Form W-2) on his or her Federal income tax return.

The IRS may revoke an employer’s participation in ATIP upon written notice. The IRS may also evaluate participating employers and employees for compliance with the ATIP procedures. Such a compliance check does not constitute an inspection of books and records for purposes of section 7605(b) of the Code nor is it a prior audit for purposes of section 530 of the Revenue Act of 1978.

For additional information, please contact any of the following lawyers:

Marianna G. Dyson, mdyson@milchev.com, 202-626-5867

Michael M. Lloyd, mlloyd@milchev.com, 202-626-1589

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