On February 6, 2023, the Internal Revenue Service (IRS) issued Notice 2023-13, which contains a proposed revenue procedure that would establish the Service Industry Tip Compliance Agreement (SITCA) program, a voluntary tip reporting program between the IRS and employers in various service industries. The IRS is issuing this guidance in proposed form to provide an opportunity for public comment. Anyone interested in providing feedback should follow the instructions in the notice and reply by May 7, 2023.
Overview of SITCA
The SITCA program is designed to take advantage of advancements in point-of-sale (POS), time and attendance systems, and electronic payment settlement methods to improve tip reporting compliance and allow the IRS to collect additional tax revenues on the currently unreported tip income amounts.
The proposed program is intended to replace the three current programs (TRAC, TRDA, and EmTRAC), which have continued largely unchanged since 2000 when the initial rules were set forth in Notice 2001-1. Details about a transition to the SITCA program are included in the proposed revenue procedure.
If approved, SITCA will serve as the sole tip reporting compliance program for employers in all service industries other than gaming. The IRS is continuing to explore opportunities within the gaming industry and, as such, this proposed program does not impact the existing Gaming Industry Tip Compliance Agreement (GITCA) program.
The SITCA program includes several features:
- Employer compliance is monitored based on actual annual tip revenue and charge tip data from an employer’s POS system, with allowance for adjustments in tipping practices from year to year.
- Participating employers demonstrate compliance with program requirements by submitting an annual report after the close of the calendar year, reducing the need for reviews by the IRS.
- Participating employers receive protection from liability under the rules that define tips as part of an employee’s pay for calendar years in which they remain compliant with program requirements.
- Participating employers have flexibility to implement employee tip reporting policies that are best suited for their employees and their business models in accordance with the section of the tax law that requires employees to report tips to their employers.
Benefits of the Program
In addition to simplifying the tip reporting compliance process, the SITCA program would also decrease taxpayer and IRS administrative burdens and provide more transparency and certainty to taxpayers. The proposed revenue procedure sets forth detailed eligibility, participation and compliance requirements for employers who want to be accepted into the proposed program.
Similar to the terms in effect under the current programs, the IRS has committed to provide protection from section 3121(q) liability by not initiating any tip examinations of the employers that are accepted into the SITCA program. The protection will not apply if the liability is based on (1) tips received by a tipped employee where the asserted liability is based upon the final results of an audit or agreement of the tipped employee, or (2) the reporting of additional tip income by a tipped employee. The liability protection will apply for periods in which the agreements are in effect, as long as the employer complies with program requirements. Failure to demonstrate compliance will result in the removal of the employer from the SITCA program, and a loss of the tip income audit protection.
Issues with the current tip audit protection rules were highlighted in a 2018 study conducted by the Treasury Inspector General for Tax Administration (TIGTA). The study concluded that the IRS was providing tip income audit protection to potentially noncompliant employers and employees, resulting in unreported tips projected to total nearly $1.66 billion (using 2016 tax year data). One of the problems identified by the TIGTA is that the IRS rarely revokes tip reporting agreements, resulting in continued tip income audit protection for noncompliant employers, and in some cases, their employees.
The SITCA program includes several features designed to result in increased tip reporting compliance in an effort to address this concern. The proposed SITCA program streamlines both compliance with and enforcement of tip reporting requirements by eliminating employee participation (and the corresponding employee tip income audit protection) and providing for automatic removal of an employer that fails to satisfy SITCA’s minimum reported tip requirement in its annual report.
Additionally, because any noncompliant employers will be removed from the program, the IRS and Treasury view the SITCA program as providing employers with an incentive to train, educate, and implement procedures for employees to provide an accurate report of all tips received. More accurate tip reporting also benefits employees upon audit and can result in higher social security wages credited to them upon retirement.
GYF will continue to monitor the progress of the proposed revenue procedure and provide updates as they become available. Please contact us at 412-338-9300 if you have any questions regarding how the SITCA program could impact your tip reporting processes moving forward if enacted.