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Voluntary Compliance Agreements - Restaurant Tax Tips

The IRS has established voluntary compliance agreements for industries, such as the restaurant industry, where tipping is customary. These agreements are designed to enhance tax compliance among tipped employees through taxpayer education, instead of through traditional enforcement actions, such as tip examinations.

Three types of tip agreements have been developed for the food and beverage industry: (download PDF files)

Comparing TRDA and TRAC Agreements

TRDA

TRAC

Requires the IRS to work with the business to arrive at a tip rate for its various occupations.

Does not require that a tip rate be established but it does require the employer to:

  • Establish a procedure where a directly tipped employee is provided (no less than monthly) a written statement of charged tips attributed to the employee.
  • Implement a procedure for the employees to verify or correct any statement of attributed tips.
  • Adopt a method where an indirectly-tipped employee reports his/her tips (no less than monthly).

Establish a procedure where a written statement is prepared and processed (no less than monthly) reflecting all cash tips attributable to sales of the directly-tipped employee.

Requires the employee to enter into a Tipped Employee Participation Agreement (TEPA) with the employer. Does not require an agreement between the employee and the employer.
Requires the employer to get 75% of the employees to sign TEPAs and report at or above the determined rate. Affects all (100%) employees.
Provides that if employees fail to report at or above the determined rate, the employer will provide the names of those employees, their SSNs, job classification, sales, hours worked, and amount of tips reported. Provides that if the employees of a business collectively underreport their tip income, tip examinations may occur but only for those employees that underreport.
Has no specific education requirement. Includes a commitment by the employer to educate and reeducate quarterly all directly and indirectly-tipped employees and new hires of their statutory requirement to report all tips to their employer.
Participation assures the employer that prior periods will not be examined as long as participants comply with the requirements under the agreement. Same rule.

EmTRAC Agreements

The IRS developed the EmTRAC Agreement program in response to employers in the food and beverage industry who expressed an interest in designing their own TRAC programs.

EmTRAC Agreements are available to employers in the food and beverage industry whose employees receive both cash and charged tips. The EmTRAC program retains many of the provisions in the TRAC agreement including:

  • The employer must establish an educational program that trains employees that the law requires them to report all their cash and charged tips to their employer.
    • Education must be furnished for newly hired employees and quarterly for existing employees.
  • The employer must establish tip reporting procedures under which a written or electronic statement is prepared and processed on a regular basis (no less than monthly), reflecting all tips for services attributable to each employee.
    The EmTRAC program provides an employer with considerable latitude in designing its educational program and tip reporting procedures, which the employer may combine.

For additional information about EmTRAC Program Requirements and EmTRAC Approval Requests, see Notice 2001-1.

Send emails to Tip.Program@irs.gov for additional information regarding the Tip Rate Determination and Education Program.


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Page Last Reviewed or Updated: 05-Sep-2014