The IRS has recently proposed a new tip reporting program. If adopted, the Service Industry Tip Compliance Agreement (SITCA) program would be available to all eligible service industry employers, excluding the gambling industry. While voluntary, participation in this program could streamline tip reporting and shield employers from potential IRS examinations and legal liability.
The new program is intended to take advantage of recent advances in electronic point-of-sale (POS) and time-tracking systems – and the eligibility requirements reflect this. To be eligible to participate in SITCA, an employer must:
- Be in a service industry where employees receive tips.
- Have at least one physical location that:
- Uses a technology-based time and attendance system to report tips.
- Utilizes a POS System that:
- Records all sales subject to tipping, and
- Accepts the same forms of electronic payment for tips as it does for sales.
- Have not violated federal, state, or local tax law for at least three years prior to applying.
Employers in the gambling industry are not eligible to participate. Employers that are classified as “large food or beverage establishments” may be subject to additional eligibility requirements.
New Program Would Replace Existing Programs and Agreements
SITCA would replace all existing IRS tip reporting and compliance programs, including:
- The Tip Rate Determination Agreement (TRDA) program
- The Tip Reporting Alternative Commitment (TRAC) program
- The Employer-Designed Tip Reporting (EmTRAC) program
Employers with existing tip reporting agreements with the IRS will have a transition period during which their existing agreements and protections will remain effective. The transition period will end the earliest of:
- The employer’s acceptance into the SITCA program,
- An IRS determination that the employer is noncompliant with the terms of their existing agreement, or
- One year after SITCA is officially put in place.
Employers with existing tip reporting agreements should monitor the progress of the new program and note the differences between SITCA and their current program. One change is the elimination of employee tipping education requirements or tax examination protections for individual employees – major elements of some of the existing tip reporting programs.
Increased IRS Scrutiny of Employee Tips Expected
In the official summary of the new program proposal, the IRS states that a motivator behind SITCA is increased tip reporting compliance. A study by the Treasury Inspector General for Tax Administration (TIGTA) determined that approximately 30 percent of employers with tip reporting agreements had underreported employee tips in 2018, with a combined estimated total of $1.66 billion in unreported tips.
In an effort to step up collection efforts, the proposed rule indicates an increased focus on employer, rather than employee, compliance and urges the IRS to revoke tip reporting agreements for noncompliance. Despite removing employee education requirements as part of the program itself, the IRS hopes that the increased scrutiny on employers “provid[es] employers with an incentive to train, educate, and implement procedures for employees to provide an accurate report of all tips received.”
Public Comments are Open until May 7, 2023
The new program proposal is open to public comments. Comments can be made online via the Federal eRulemaking Portal or through the mail at:
CC:PA:LPD:PR (Notice 2023-13)
Room 5203, Internal Revenue Service, P.O. Box 7604
Ben Franklin Station
Washington, D.C., 20044
Interested employers are encouraged to review the program details and offer their thoughts before the May 7 deadline.
Critchfield, Critchfield & Johnston will track the progress of SITCA and provide updates if and when the new program is finalized. The attorneys at Critchfield work with employers to help ensure compliance with a variety of employment matters, including employee benefits, labor laws, policy development, and workplace training, and more. If you have questions related to this new tip reporting program or any other employment concerns, you can reach us through our online contact form, by calling 1-800-686-0440, or by reaching out to a Critchfield office in your area.