June 26, 2000

Court Decisions, Regulatory Approach Create Perilous Landscape of IRS Audits

The National Restaurant Association has adopted a position strongly urging restaurateurs to implement an approved tip reporting program as the most reliable course of action for avoiding potentially damaging audits and assessments by the Internal Revenue Service (IRS) for alleged underreported tips.

The position, approved by the Association’s Board of Directors, was crafted amid several highly consequential developments. The IRS has announced that it will, beginning Oct. 1, reinstate employer-only audits and assessments on underreported tips for Federal Insurance Contribution Act (FICA) taxes in cases of “flagrant violations” of tip-reporting rules. In addition, a string of four U.S. Court of Appeals cases have been decided in favor of the IRS’s ability to conduct these employer-only audits and assessments. >p>To avoid being targeted, a restaurateur can develop a tip education program through which the business agrees to advise its workers of tip-reporting requirements; implement procedures by which employees report received tips; comply with tax reporting, filing and payment requirements; and maintain certain employment records. The employer could submit the program in writing to the IRS for approval, which would be responded to by the agency within 60 days.

If the program were approved, the employer would receive protection from employer-only audits and assessments. Such an approach is called by the IRS an Employer’s Tip Reporting Alternative Commitment (EmTRAC). An EmTRAC would allow employers the flexibility to develop the programs in such ways that would best serve their needs without entering into a contract with the IRS.

Another option to receive protection from employer-only audit and assessments is to sign the IRS’s Tip Reporting Alternative Commitment (TRAC)—through which the employer agrees to take essentially the steps outlined above—and in return, receive protection from employer-only assessments. The TRAC option, however, necessitates signing an actual agreement with the IRS, unlike the EmTRAC approach.

It is the Association’s understanding that Board of Directors Member Ed Tinsley’s (K-BOB’S Capital Resource Group Ltd, Albuquerque, N.M.) K-CARE® program—a 401(k) style financial benefits program that both provides employees more money and encourages accurate tip reporting—is an EmTRAC approach. It is also the Association’s understanding that the K-CARE® program has been preliminarily approved by the IRS as an alternative to TRAC.

For several years, the Association has fought in court to protect the industry from IRS assessments, maintaining that the practice of conducting only employer exams without determining which employees underreported tips unfairly exposes employers to huge tax assessments.

”While the National Restaurant Association continues to strongly oppose the IRS ‘employer-only’ methods, the agency’s recent announcement reinstating the ‘employer-only’ approach could put many restaurants at risk,” says Association Senior Vice President and General Counsel Peter Kilgore.

”Therefore, we strongly encourage restaurateurs to examine the advantages and disadvantages of crafting an EmTRAC program or signing a TRAC agreement.” In the meantime, the Association will submit written comments to the IRS stating its continuing opposition to employer-only audits and assessments.

Source: Washington Weekly, National Restaurant Association