4.88.1  Examination Issues Pertaining to ITG Cases

4.88.1.1  (06-01-2006)
Overview

  1. Many of the basic techniques for examining returns of Indian tribal entities are similar to those required of revenue agents (examiners) under the Small Business/Self Employed (SB/SE) and Large and Midsized Business (LMSB) Divisions when examining individual, partnership, and corporate returns. These procedures are found in IRM Part 4, Examining Process.

  2. Procedures that apply to more than one IRS process, including the examination process, are found in IRM Part 25, Special Topics.

  3. While IRC section 7871 Code indicates that Indian tribal governments are treated as states for certain enumerated Internal Revenue Code purposes, these do not include employment taxes. Thus, services performed for a tribal government are subject to employment taxes on the same basis as services performed for other taxpayers.

  4. Of particular interest to ITG specialists are the employment tax procedures, which are described below.

4.88.1.2  (01-08-2010)
ITG Employment Tax Related Issues

  1. This section provides a brief overview of employment taxes and serves as a reference guide for Indian Tribal Government (ITG) specialists in handling employment taxes of Indian tribal governments. General employment tax procedures are found in IRM 4.23, Employment Tax Handbook. See also Publication 4268, ITG Employment Tax Guide.

  2. Determinations of employment tax liabilities require finding that there is an employer, an employee, and payment of wages. Federal Employment Taxes consist of five separate taxes:

    • Federal Insurance Contributions Act (FICA) IRC sections 3101 -3128,

    • Railroad Retirement Act (RRTA) IRC sections 3201-3241,

    • Federal Unemployment Tax Act (FUTA) IRC sections 3301-3311, (For special FUTA law concerning Indian tribal governments, See IRM 4.88.1.2.2.

    • Collection of Income Tax at the Source of Wages (WT) IRC sections 3401-3406, and

    • Employment Contributions Act (SECA) - IRC 1401-1403.

  3. When processing these cases, ITG specialists will follow guidelines for forms and procedures relating to TE/GE examinations under IRM Part 4.

  4. Procedures specific to TE/GE examination cases are found in IRM 4.5, TE/GE AIMS. General AIMS procedures are found in IRM 4.4, AIMS Processing Handbook. See also, IRM 4.4.10, Employment/Excise Tax Adjustments for detailed procedures on AIMS processing procedures.

  5. For expert advice, ITG Specialists can direct questions to members of the Compliance and Program Management (CPM) staff or the ITG Knowledge Sharing Group on Employment Taxes.

4.88.1.2.1  (01-08-2010)
Resources and Issues

  1. IRM 4.23, Employment Tax, serves as the foundation for addressing consistent administration of employment taxes by various IRS functions involving the following taxes:

    Description of Taxes Forms Reported On
    a) Withholding of income tax on wages of employees (W/T) Form 941, Employer's Quarterly Federal Tax Return
    Form 941-M Employer's Monthly Federal Tax Return
    Form 941 X Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund
    Form 943, Employer's Annual Tax Return for Agricultural Employees
    Form 944, Employer's ANNUAL Federal Tax Return
    b) Employer and employee taxes (Medicare and Federal Insurance Contributions (FICA)) Form 941, Employer's Quarterly Federal Tax Return
    Form 941-M (Employer's Monthly Federal Tax Return)
    Form 943 Employer's Annual Federal Tax Return for Agricultural Employees
    Form 944, Employer's ANNUAL Federal Tax Return
    c) Unemployment insurance, Federal Unemployment Tax Act (FUTA) Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
    d) Employer tax and employee tax for retirement purposes imposed on employers of individuals performing railroad services, and the railroad employee representative's tax under the Railroad Retirement Tax Act Form CT-1, Employer's Annual Railroad Retirement Tax Return
    Form CT-2, Employee Representative's Quarterly Railroad Tax Return
    e) Withholding of tax on all non-payroll payments, e.g. gambling winnings, per capita payments, pensions, etc. Form 945, Annual Return of Withheld Federal Income Tax, or
    f) Backup withholding requirements under IRC section 3406. Form 945, Annual Return of Withheld Federal Income Tax
    g) Withholding of tax under IRC sections 1441 and 1442 Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

  2. ITG Specialists should review the IRS Policy Statements that govern the Employment Tax Program in IRM 1.2.1 and become familiar with them.

  3. The Service administers the employment taxes imposed by Chapters 21 through 24 of the Internal Revenue Code. An important phase of administration of employment taxes is interpreting the sections of the Code applicable to these taxes, that is, issuing rulings and technical advice that clarify the intent of these sections.

    1. The Service refers all questions of eligibility for and computation of social security benefits to the Social Security Administration, Baltimore, Maryland, or to their nearest local field office.

    2. Similarly, inquiries relating to unemployment benefits are referred to the appropriate State Unemployment Compensation Board.

    3. Those relating to railroad employee retirement benefits are sent to the Railroad Retirement Board, Chicago, Illinois.

  4. Technical questions arising in employment tax cases involving the interpretation and application of tax laws, regulations, or other precedents published by the IRS Headquarters to a specific set of facts should be referred to the ITG Headquarters.

  5. Requests for technical advice must include:

    • the facts,

    • the issues for which technical advice is requested

    • the applicable law,

    • the Service's position, and

    • the taxpayer's position.

  6. Rev. Proc. 2009-4 and Rev. Proc. 2009-5, (revised annually) provide procedures to request private letter rulings and technical advice, etc. See IRM 4.88.1.14.

  7. The Classification Settlement Program (CSP) establishes procedures under an optional classification settlement program that will allow Indian tribal governments and ITG Specialists to resolve worker classification cases as early in the administrative process as possible. See IRM 4.23.6, Classification Settlement Program.

  8. Employment tax returns do not contain information that would provide a basis for classifying returns for examination potential. Independent selection of returns should be based on known or probable areas of non-compliance.

  9. The examination work papers and reports provide the basis for the decisions reached by the employment tax examiner. Only on the basis of the material in the work papers can a reviewer determine if the examination was complete and correct. The work papers should include:

    • explanations

    • analysis and conclusions developed and should be sufficiently complete so, generally, no additional comments will be needed in the transmittal letter for any items covered

    • documentation of acceptance of the Forms 1099 as correctly filed and that potential employer/employee relationships were considered

    • All notes made before, during, and after the examination

  10. ITG Specialists make determinations for FICA tax liability. Three factors must be present for FICA tax liability:

    1. The relationship of employer-employee must exist.

    2. The remuneration paid by the employer must constitute "wages" for purposes of the tax.

    3. The employee must perform services that constitute "covered employment" (as opposed to "excepted employment" ), for purpose of the tax.

  11. Under IRC section 6205, an employer who makes or has made an under-collection or an underpayment of employee taxes (FICA/RRTA) or income tax (withholding), may make interest-free payments of the tax due when certain conditions are met. IRC section 6205 provisions are applicable to per capita withholding assessments made pursuant to IRC section 3402(r), as well as certain back-up withholding assessments under IRC section 3406.

  12. Under IRC Section 3509, if an employer fails to deduct and withhold any income tax or employee's share of FICA tax by reason of treating employees as independent contractors, the employer may be entitled to reduced rates for determining the employer's employment tax liability as described in IRM 4.23.8.5.

  13. When an ITG Specialist discovers that a taxpayer has failed to file required federal tax returns, he/she will:

    1. Determine the taxable periods for which the taxpayer was required to file returns.

    2. Ascertain the reasons why the taxpayer failed to file the required returns.

    3. Determine whether any indications of fraud exist.

    4. Secure the non-filed return if the tribe is under examination. If the Specialist is conducting a Compliance Check, he/she will include a statement on the closing letter if under the Compliance Check that the tribe will prepare and file the non-filed return as soon as possible.

  14. In accord with Policy Statement 4-103, after employment tax has been assessed as a result of an examination action, the taxpayer will generally be required to pay the assessment and file a claim for refund before receiving any further consideration of the case. However, other circumstances may arise to allow for a claim for abatement to be considered on its merits.

4.88.1.2.2  (06-01-2006)
Federal Unemployment Tax Act (FUTA)

  1. The enactment of Section 166 of the Community Renewal Tax Relief Act of 2000 (Public Law 106-554, codified as IRC section 3306(c)(7)) changed how FUTA applies to Indian tribal governments. IRS Announcement 2001-16 was written to provide guidance to federally recognized Indian tribal governments about their Federal Unemployment Tax Act obligations for 2000.

  2. For services rendered after December 20, 2000, federally recognized Indian tribal governments are exempt from FUTA. This includes any subdivision, subsidiary, or wholly owned business enterprise of the tribal government. Instead, an Indian tribal government may elect to make contributions to the State unemployment fund as if services by its employees were employment under FUTA, or it may make payments in lieu of the contributions in amounts equal to the unemployment benefits attributable under the State law to such service. A separate election may be made for any subdivision, subsidiary, or business enterprise wholly owned by the tribal government.

  3. To ensure proper determination of FUTA liability, the State will need to advise IRS ITG and the Department of Labor of any determination it has made concerning a tribe's failure to make required payments or post a required bond and whether the tribe has subsequently satisfied these liabilities.

  4. If a tribe fails to make payments required (including assessments of interest and penalty) within 90 days of final notice of delinquency, the State will immediately notify separately:

    • the United States Department of Labor

    • ITG CPM in Washington at the following address:


    IRS Indian Tribal Governments
    SE:T:GE:ITG
    1111 Constitution Avenue, N.W.
    Washington, DC 20224

4.88.1.2.3  (06-01-2006)
Wages

  1. Generally, service performed by employees of tribal governments or tribal business enterprises constitutes employment and their wages are subject to federal employment taxes. Payments to tribal and non-tribal employees are to be reported on Form W-2.

  2. The Internal Revenue Code provides that for purposes of FICA, FUTA, and federal income tax withholding, the term " wages" means all payments received for "employment" with certain specified exceptions. Therefore, unless payments to employees are excepted from the term "wages " or the services performed by the employee are excepted from the term "employment" , such payments will be subject to FICA, FUTA, and federal income tax withholding.

  3. Questions often arise concerning services performed for the tribe on tribal land by a tribal member who lives on the reservation. Individual tribal members are citizens of the United States and are subject to federal income tax, unless specifically exempted by a treaty or statute (see Rev. Rul. 67-284, 1967-2 C.B. 55).Note: the rules for state income tax of tribal members may differ.

4.88.1.2.4  (06-01-2006)
Exceptions

  1. A limited exception from employment tax is found in IRC section 7873. Section 7873 provides that no employment tax shall be imposed on remuneration paid for services performed in a fishing rights-related activity of an Indian tribe by a member of such tribe for another member of such tribe or for a qualified Indian entity.

  2. There is a narrow exception for salaries paid to tribal council members for services performed by them as council members. Rev. Rul. 59-354,1959-2 C.B. 24, holds that while these amounts are includible in the council members' gross income, they do not constitute wages for purposes of FICA, FUTA, and income tax withholding.

  3. Rev. Rul. 59-354 further states that although amounts paid to tribal council members are not subject to employment taxes, services performed by other salaried employees of Indian tribal councils and by the employees of tribal business enterprises constitute employment and their wages are subject to federal employment taxes.

4.88.1.3  (06-01-2006)
Information Reporting

  1. Indian tribes are required to file information returns for payments to various recipients. These forms are to be issued to the recipient and provided to the Service. See IRM 4.88.1.3.3 for a discussion of reporting requirements.

  2. There are two areas of Form 1099 issuance and withholding requirements that the ITG Specialist needs to be especially familiar with in conducting outreach, compliance checks, and examinations on Indian tribes. These involve distribution of net gaming revenue to tribal members. ( See IRM 4.88.1.7., Distributions of Gaming Revenue) and payments to non-employees other than net gaming revenue.

  3. This section also discusses the filing of Form 945, deposit requirements, and abatement of withholding assessments.

4.88.1.3.1  (06-01-2006)
Non-Employees

  1. The tribe may make payments to multiple non-employees (e.g., service providers, rents, etc.) during the course of any given year. When payments to a non-employee of fixed or determinable gains, profits and income aggregate to $600 or more, a Form 1099 is required pursuant to IRC section 6041.

  2. IRM 4.10.5, Required Filing Checks, covers reportable payments to be included on the Form 1099. See IRM 4.10.5.6.

4.88.1.3.2  (01-08-2010)
Backup Withholding

  1. Backup withholding provisions of IRC section 3406 are applicable to Indian tribal governments. See relevant sections of IRM 4.23.8.13 and IRM 20.1.7.9.2.4 . These sections include backup withholding requirements for the tribe when the payee fails to supply its Taxpayer Identification Number (TIN) prior to the payment, and requirements when notified by the Service that a payee is subject to backup withholding.

  2. Form W-9 may be utilized to secure the TIN.

  3. The backup withholding rate is 28 percent of the applicable payments.

  4. Treasury Regulation Section 31.3406 is helpful in determining when backup withholding applies. Applicable penalties under IRC section 6721, failure to file correct information returns, and IRC 6722, failure to furnish correct payee statements, are addressed under Treasury Regulations Sections 301.6721 and 301.6722.

4.88.1.3.3  (01-08-2010)
Reporting and Deposit Requirements

  1. IRM 20.1.4.5 provides information on Form 945, including deposit requirements. Form 945 is to be used for reporting required payments for backup withholding. Form 945 deposit requirements and federal tax deposit penalty provisions parallel provisions for the Form 941.

  2. Publication 15, Circular E provides a good reference for the tribes on deposit requirements.

  3. After January 1, 2006 certain qualifying employers with no tax liability/deposit requirement exceeding $1,000 a year may qualify for annual filing and payment rather than making quarterly deposits. See IRM 4.23.8 , Determining Employment Tax Liability and the directions for Form 944 Employer's ANNUAL Employment Tax Return.

4.88.1.3.4  (01-08-2010)
Abatement Procedures

  1. There are provisions under IRC section 3402(d) which allow for abatement of the income tax portion of:

    • employment tax assessments

    • back-up withholding assessments under IRC section 3406, and

    • withholding assessments under IRC sections 3402(q) and 3402(r)

  2. Procedures to use in the abatement process, including use of Form 4669 and Form 4670, are included in IRM 4.23.8.4 and IRM 4.23.8.13 This involves the attestation of the payee as to having filed the subject return and paid the resulting liability.

  3. When the Form 4669 and Form 4670 are secured prior to closing the examination, the applicable procedures are to be utilized at that time.

4.88.1.4  (01-08-2010)
Federal Tax Status Of Indian Tribal Governments

  1. The Service has responsibility for federal taxation issues involving Indian tribal governments. As a result of gaming compacts negotiated between the tribes and states, other types of regulations may have been created that involve state oversight. However, the Service is charged with interpreting federal tax laws as they relate to tribal entities and enterprises.

  2. Rev. Rul. 67-284 states that an Indian tribe is not subject to income taxes. An individual tribal member, however, if not otherwise exempt from income taxation, must include in gross income amounts distributed or constructively received by the tribal member.

  3. Indian tribes are not entities subject to federal income tax because they are not included in IRC section 1 (individuals, trusts and estates) or IRC section 11 (corporations). A tribe must be recognized by the Department of the Interior to be treated as such for federal income tax purposes. See Rev. Proc. 2008-55. However, it is not necessary for an Indian tribe to meet the requirements of IRC section 7871 in order to be treated as an Indian tribe for federal income tax purposes.

  4. A tribe may operate businesses either on or off its reservation. The tribe, and any unincorporated business owned by the tribe, is not subject to federal income tax, regardless of where the business is located. However, a corporation formed by a tribe may be subject to federal income tax, depending on the form of incorporation which the tribe chooses. See Rev. Rul. 94-16, 1994-1 C.B.19, as amplified in Rev. Rul. 94-65, 1994-2 C.B.14.

  5. A tribe may choose to form a corporation in different ways, including:

    1. Indian Reorganization Act of 1934: The tribe may incorporate under section 17 of the Indian Reorganization Act of 1934 (IRA) 25 U.S.C. section 477 (section 17 corporation). This type of corporation is not subject to income tax, regardless of where the business is located. An approval article or certificate signed by the Secretary of the Interior is evidence of incorporation under the Indian Reorganization Act.

    2. Oklahoma Indian Welfare Act: Tribes located in Oklahoma are not eligible to incorporate under section 17 of the IRA. Instead, Oklahoma tribes may incorporate under section 3 of the Oklahoma Indian Welfare Act, 25 U.S.C. section 503 (section 3 corporation). This type of corporation is not subject to income tax, regardless of where the business is located. An approval article or certificate signed by the Secretary of the Interior is evidence of incorporation under the Oklahoma Indian Welfare Act.

    3. State Chartered Corporation: The tribe may form a corporation under state law. This type of corporation is ordinarily subject to federal tax on income earned on or after October 1, 1994, regardless of where the business is located. A state chartered corporation formed by a tribe is taxed just like any other corporation because the state charter creates a separate entity which differentiates it from the tribe. A Certificate of Incorporation issued by the state is evidence of incorporation under state law.

  6. In addition, a tribe or a corporation formed by a tribe may be a partner in a partnership:

    1. Partner in a Partnership: A tribe that is a partner in a partnership is not subject to federal income tax. However, a tribally owned state chartered corporation that is a partner will be subject to federal income tax on its distributive share of partnership income.

    2. In addition, many tribes form corporations utilizing their own corporate code or resolution process. The tax status of corporations chartered under tribal law and owned 100% by the tribe is not clear. A revenue ruling is anticipated to address this issue. The revenue ruling will limit its consideration to those entities that are 100% owned by the tribe under whose law they are formed. In the meantime, it is recommended that tribal governments adopt one of the incorporation methods whose tax consequences are clear. See Rev. Rul. 94-65.

4.88.1.5  (06-01-2006)
Indian Gaming

  1. In 1988 Congress enacted the Indian Gaming Regulatory Act (IGRA), 25 U.S.C. Sections 2701-2721.

4.88.1.5.1  (06-01-2006)
Background

  1. The intent of Indian Gaming Regulatory Act (IGRA) is to:

    1. Provide a statutory basis for the operation of gaming by Indian tribes to promote tribal economic development, self-sufficiency, and strong tribal governments.

    2. Provide a statutory basis for the regulation of Indian gaming to ensure the tribes are the primary beneficiaries

    3. Establish an independent federal regulatory authority for Indian gaming, federal standards for Indian gaming, and the National Indian Gaming Commission (NIGC), to meet congressional concerns regarding Indian gaming and protect such gaming as a means of generating tribal revenue.

    4. Shield gaming from organized crime and other corrupting influences; and

    5. Ensure that both the operators and the players conduct gaming fairly and honestly.

  2. Since IGRA's passage in 1988, the tribes and states have successfully negotiated hundreds of tribal-state gaming compacts. Gaming provides significant revenues for many Indian tribes.

  3. The term "gaming" has been divided by IGRA into three classes:

    Class Description
    Class I Gaming is defined as consisting of social games that have prizes of minimal value, and traditional tribal games played in connection with tribal ceremonies or celebrations.
    Class II Gaming primarily includes: bingo (whether or not it is electronically enhanced), pull-tabs, lotto, punch boards, tip jars, instant bingo, any games similar to bingo, and any non-banking card games allowed by state law.
    Class III Gaming includes all gaming that is not Class I or Class II gaming, which primarily includes slot machines, casino games, banking card games, dog racing, horse racing, and lotteries.

  4. All Tribal Governments conducting or sponsoring gaming activities need to be aware of the federal requirements for income tax, employment tax and excise tax. See Publication 3908, Gaming Tax Law for Indian Tribal Governments. This publication is designed to provide basic information to assist in meeting that need.

  5. As noted above in IRM 4.88.1.4 , the structure and ownership of the tribal gaming operation have an important impact on the taxability of the income.

4.88.1.5.2  (01-08-2010)
Tribal Gaming Operational Responsibilities

  1. This subsection explains the record keeping responsibilities of a tribal gaming operation with regard to gaming income, payouts, and expenses.

  2. Tribal governments that are conducting gaming operations generate a substantial amount of income, primarily in the form of cash. The cash passes through many hands, which could result in numerous abuses. One of Congress's concerns was the potential for criminal abuse. As a result, IGRA provides the framework to handle the necessary record keeping when a tribe is involved in either Class II or Class III gaming.

  3. Whether the tribe has hired an operator to run its gaming operation, or it is handling the gaming operation itself, it must follow the regulations issued by the National Indian Gaming Commission (NIGC) that cover the Minimum Internal Control Standards (MICS) for Indian Gaming. These standards are applicable if they are more stringent than the standards included in a tribal-state compact. However, if the tribal-state compact is more stringent, then the compact standards apply.

  4. The NIGC Regulations cover the internal controls needed for all Class II and Class III gaming operations. However, an October 2006 decision of an United States Court of Appeals in Colorado River Indian Tribes vs. NIGC found there was no statutory basis empowering the Commission to regulate Class III gaming operations.

    Note:

    Since the Federal Court rulings in the Colorado River Indian Tribes vs. NIGC litigation precluded NIGC's mandatory application of its MICS to Class III gaming, discussions have been ongoing in Congress and with tribes about filling any gap in oversight which might threaten the real or perceived integrity of Indian gaming.

  5. Gaming operations are required to be in compliance at the time operations commence. The tribal entity must also have an independent Certified Public Accountant verify that the Internal Control Systems that are in place are in compliance with the Minimum Internal Control Standards of the NIGC's regulation, or with the tribal-state compact (25 CFR 542.3). Failure to meet these standards may result in temporary closure and/or civil fines.

  6. The NIGC Regulations can be obtained from the NIGC, or can be accessed from the NIGC web site at http://www.doi.gov/nigc/laws.htm .

  7. The memorandum of understanding between the IRS Indian Tribal Governments office and the National Indian Gaming Commission (NIGC)is available at ITG site on IRS.gov. at http://www.irs.gov/govt/tribes/topic/index.html .

4.88.1.5.2.1  (01-08-2010)
Record Keeping

  1. Whether the tribe has hired an operator to run the gaming operation, or it is running the operation itself, it is required to ensure the maintenance of all books and records used to determine gross and net income, and to determine information reporting responsibilities such as Form W-2G.

    Note:

    There are record keeping retention requirements codified in IRC sections 4403 and 6001 and the related Treasury regulations, Section 44.4403-1 and Section 44.6001-1.

  2. The National Indian Gaming Commission Regulations require that the books and records of a tribal Class II or Class III operation be retained for at least 5 years. 25 C.F.R. section 571.7 requires that records be retained as long as the contents may be material in administration of any Internal Revenue law. This usually means as long as the period of limitation has not expired on the applicable tax year (generally three years from the later of the date filed or the due date of the return). In addition, Employment Tax Regulations specify that records must be preserved for at least four years after the due date of employment tax returns, or four years from the date the tax was paid, whichever is later. Refer to Treasury Regulation 31.6001-1.

  3. Tribal-state compacts may contain additional record keeping and reporting requirements for tribal gaming operation.

4.88.1.5.3  (01-08-2010)
Filing Requirements

  1. This subsection describes the common filing requirements that relate to gaming activities conducted by tribal entities. Tribal entities conducting gaming activities generally handle and prepare the following forms:
    Forms Generally Filed

    Form Description Due
    11-C Occupational Tax and Registration Return for Wagering To Register Annually, by July 1, & Upon Certain Changes in Ownership or Control
    730 Monthly Tax Return for Wagers Monthly
    941 Employer's Quarterly Federal Tax Return Quarterly
    944 Employers' Annual Federal Tax Return (if informed to do so by the IRS) Annual
    945 Annual Return of Withheld Federal Income Tax Annual
    1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons Annual
    1042-S Foreign Person's U.S. Source Income Subject to Withholding Annual
    1096 Annual Summary and Transmittal of U.S. Information Returns Annual
    1099-MISC Miscellaneous Income Annual
    5754 Statements by Person(s) Receiving Gambling Winnings None
    8027 Employer's Annual Information Return of Tip Income and Allocated Tips Annual
    8109 Federal Tax Deposit Coupon Book Ongoing
    W-2 Wage and Tax Statement Annual
    W-2G Certain Gambling Winnings Annual
    W-3 Transmittal of Wage and Tax Statement Annual
    FinCen 102 Suspicious Activity Report by Casinos and Card Clubs As needed
    FinCEN 103 Currency Transaction Report by Casino 15th day after transaction

  2. The use of a promoter or contractor to operate gaming for a tribal government will not relieve the tribe of its responsibility to file the appropriate forms.

4.88.1.5.3.1  (01-08-2010)
Forms for Reporting Gaming Winnings

  1. Form W-2G- Certain Gambling Winnings:

    1. Certain wagering transactions require the filing of Form W-2G and Form 1096, Annual Summary and Transmittal of U.S. Information Returns. The Form W-2G is filed when an individual(s) wins a prize with a minimum specific dollar amount at a gaming event. The winner must provide the game operator with proper identification including his/her name, permanent address and social security number. Form W-9, Request for Taxpayer Identification Number and Certification, may be used to record the information.

    2. The Form W-2G should be completed by tribal gaming operator upon payment of the prize to the winner and provided no later than January 31 of the following year. Copies B, C, and 2 of this form should be given to the prize winner at the time of completion. Copy A of Form W-2G and Form 1096 must be submitted to the Service by February 28 of the year following the year the gaming winnings were paid. (Electronic filers of Form W-2G have until March 31 to file.) Copy 1 of Form W-2G is submitted to the State, and the payer retains Copy D.

    3. The tribal gaming operation may be required to file the Forms W-2G, and Forms 1099 either by magnetic media or electronically. Generally, if you are required to prepare and file 250 or more information returns, you must file on magnetic media or electronically. The 250 or more requirement applies separately to each type of form. For example, if you must file 500 Forms W-2G and 100 Forms 1099-MISC, you must file Forms W-2G on magnetic media or electronically, but you are not required to file Forms 1099-MISC on magnetic media or electronically.

    4. To receive a waiver from the required filing of information returns on magnetic media or electronically, submit Form 8508, Request for Waiver From Filing Information Returns Electronically/Magnetically, at least 45 days before the due date of the returns.

  2. Form 945- Withholding and Backup Withholding:

    1. Withholding - tribal gaming operations making payment of certain gaming winnings must withhold from these payments a tax of 25% of the payment. The tribal gaming operation will report the amount of gambling withholding for federal purposes on Form 945, Annual Return of Withheld Federal Income Tax.

    2. If there are any tribal-state compact requirements for state withholding, they should be reported on the applicable state forms.

    3. Backup Withholding -- Backup withholding refers to the withholding of tax that applies to reportable prizes when the recipient fails to provide a taxpayer identification number. One method of supplying a taxpayer identification number, to prevent backup withholding, is completion of the Form W-9. A taxpayer identification number is not supplied if the number is obviously incorrect (i.e., the number does not contain nine digits or contains alpha characters). The backup withholding rate is 28%.

    4. Reporting the Withholding -- The tribal gaming operation reports regular withholding from gaming winnings on Form 945, Annual Return of Withheld Federal Income Tax, line 1. Backup withholding is reported on Form 945, line 2. Form 945 is filed annually by January 31st of the year following the year of the winnings.

      Note:

      If deposits of full payment of the taxes for the year were on time, filing is by February 10

    5. The following table explains when withholding and backup withholding is required:

      GAME Regular Gambling Withholding Required on Prizes Backup Withholding Applies on Prizes Equal to or Exceeding
      Bingo N/A $1,200
      Slot Machines N/A $1,200
      Keno N/A $1,500
      Any wagering transaction ($5,000 or less) N/A $ 600
      Lotteries, Sweepstakes, and wagering pools Over $5,000 $ 600
      Horse Races, Dog Races, Instant Bingo Game Prizes/Pull-Tabs, and Jai Alai (when winnings are at least 300 times the amount wagered) Over $5,000 $ 600
      Other wagering transactions (when winnings are at least 300 times the amount wagered) Over $5,000 $ 600

      Note:

      See Gaming Withholding and Reporting Thresholds or Exhibit 4.88.1-1 for further assistance.

  3. Forms 1042 and 1042-S - Payments and Withholding for Nonresident Aliens:

    1. Payments made to a nonresident alien are reported on Form 1042-S, Foreign Person's U.S. Source Income Subject To Withholding. Payments for gambling winnings are reportable. Unlike the requirements for Form W-2G, there is no dollar threshold for withholding or reporting purposes. Therefore, if the payer pays any gambling winnings to a nonresident alien, the payer must comply with the rules of this section. The withholding rate on nonresident aliens is generally 30%, unless the foreign country has a treaty with the United States for a lower rate. Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, or a substitute form containing a substantially similar statement, provides information as to whether an individual is a nonresident alien individual, foreign entity, or exempt foreign person not subject to certain U.S. information return reporting or backup withholding rules.

    2. The withholding is reported to the IRS on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. The Form 1042 is filed with any paper Forms 1042-S with the Internal Revenue Submission Processing Campus in Philadelphia, PA by March 15 of the year following the year of payment.

    3. Form W-7, Application for IRS Individual Taxpayer Identification Number (ITIN), is used to apply for ITINs for certain non-resident and resident aliens, their spouses and dependents who do not qualify for or cannot get a Social Security Number (SSN). Form W-7 requires documentation substantiating foreign/alien status and true identity for each individual. Documentation and Form W-7 may be submitted to the Philadelphia Submission Processing, presented at IRS walk-in offices or processed through an Acceptance Agent authorized by the IRS. There is a limited basis provision for "same day authorization" in casinos to reduce the burden of this requirement.

    4. ITINs are required of resident or non-resident aliens who wish to file a tax return to claim tax treaty benefits and/or claim a refund of withholding.

    5. No tax is imposed on, and no reporting is required for, gambling income of a nonresident alien playing the following games in the United States:

        Blackjack
        Baccarat
      . Craps
        Roulette
        Big-6 Wheel

  4. Forms 1099 - Information Returns:

    1. Prizes and awards of $600.00 or more are reported on Form 1099-MISC. Include the fair market value of merchandise won. If a wager is made, report the winnings on Form W-2G.

    2. There are different types of information returns for reporting non-employee payments and for reporting other types of miscellaneous payments. Tribal gaming establishments are required to file the appropriate information returns, just as any other trade or business is required to do.

4.88.1.5.3.2  (01-08-2010)
Cautions

  1. A tribal gaming operation will be responsible for paying regular gambling withholding or backup withholding, whether or not it collects the withholding from the prize recipient. The best time to collect withholding or backup withholding is before the payment is made to the recipient.

  2. If the casino pays the withholding rather than deducting it from the payment, then the payment is deemed to include the amount of federal income tax paid by the casino. For example, if the gambling withholding at 25% is required but the casino pays it, then the income tax due is 33.33% of the winnings. If backup withholding of 28% is required but the casino pays it, then the income tax due is 38.88% of the payment.

  3. On Form W-2G, the amount of tax paid by the tribal casino is shown in the box for federal income tax withheld, and is also added to the amount of the prize if the tax is not deducted from the prize. See Notice 93-7, 1993-1 C.B. 297, for additional information. See Exhibit 4.88.1-2.

4.88.1.6  (01-08-2010)
Anti Money Laundering/Title 31

  1. The Indian Tribal Governments office assumes responsibility for the identification of entities subject to the Bank Secrecy Act (BSA), Title 31 U.S.C. and Title 26 IRC section 6050I, that are owned by Indian tribal governments.

  2. For a description of the working relationship and activities of ITG and SB/SE regarding:

    • Notification and Anti Money Laundering (AML) outreach activities relating to Title 31 and IRC section 6050I

    • Jurisdiction over the planning and conduct of Bank Secrecy Act and section 6050I examinations and reviews involving entities owned by Indian tribal governments

    • The memorandum of understanding with the IRS BSA Division may be reviewed at MOU Between ITG and Bank Secrecy Act

  3. For all other questions regarding issues and requirements under Public Law 91-508, commonly known as the Bank Secrecy Act, or Title 31 of the Code of Federal Regulations and a detailed discussion of casino operations and AML requirements under the BSA see IRM 4.26, Bank Secrecy Act.

  4. ITG cannot make any oral or written statements in regard to the quality or accuracy of a tribe's BSA/AML compliance program. This applies to any informal discussions, BSA outreach events, or BSA compliance checks. ITG's role is simply to provide BSA information to the tribal entity, and make recommendations for possible improvements in their BSA program. Communications, including the closing letter for a BSA Compliance Check, cannot be conveyed in a manner that could be construed to indicate ITG found no problems with the tribe's BSA compliance program. That is a finding that can only be made as the result of a BSA examination by SBSE staff

4.88.1.6.1  (06-01-2006)
Authorities

  1. In 1970, Congress enacted the Bank Secrecy Act. This far-reaching act instituted rules and regulations for the reporting of currency transactions of greater than $10,000 and for certain identification and record keeping requirements. The Act was amended in 1985 to include casinos with gross annual gaming revenue (GAGR) in excess of $1,000,000. This coverage was extended to Indian casino operations in August 1996.

  2. Due to the cash intensive nature of gaming activity and the huge volume of wagering throughout the United States, casinos find themselves dealing with large numbers of individuals and massive amounts of currency. The information in this section is intended to provide a basic understanding of the BSA and how to comply with its provisions.

  3. Casinos and card rooms are designated as financial institutions subject to the requirements of the BSA if:

    1. The property is licensed as a casino by state, local, or tribal governments, and

    2. The property has gross annual gaming revenues in excess of $1,000,000.

4.88.1.6.2  (06-01-2006)
Reporting

  1. FinCEN Form 103, Currency Transaction Report by Casinos (CTRC) is used to report transactions. This form must be filed with the Service's Detroit Computing Center by the fifteenth calendar day after the day of the transaction.

  2. A report is required for a single or multiple transactions over $10,000.

    1. Single transaction - a transaction of more than $10,000 in currency occurring at one location at one time.

    2. Multiple transactions - a series of transactions each less than $10,000, which, when aggregated, exceed $10,000 during the gaming day.

  3. The casino must have knowledge that multiple transactions exceeded $10,000 in a gaming day and are by, or on behalf of, one individual. The casino is deemed to have knowledge if any employee, proprietor, officer, director or partner has knowledge the transactions occurred. It is not necessary to have personally observed the transactions; it can also be acquired from examining books, records, logs, computer files, etc.

  4. In order to properly file a CTRC, the casino is required to secure certain information from the customer (including foreign nationals) BEFORE concluding the transaction. The information includes:

    1. Name and current address

    2. Date of Birth

    3. Account number (with the casino, if applicable)

    4. Social Security number

  5. Customer identification required by the CTRC must be verified using appropriate forms of identification:

    1. Driver's license

    2. Documents acceptable within the banking community

    3. Passport or other form of non-resident alien identification

      Note:

      This information must be documented on the CTRC.

4.88.1.6.3  (06-01-2006)
Record Keeping

  1. There are extensive record keeping requirements for financial institutions, and additional ones for casinos. A complete list of requirements can be found in 31 CFR 103. See 31 CFR 103.36 for record keeping requirements specifically for casinos.

  2. One of the important requirements concerns deposit of funds, account opened, or credit extended. The casino must secure and maintain the name, permanent address, and Social Security number for each person having a financial interest in the account. The information must be verified by examining a driver's license or any other form of identification that is acceptable within the banking community for cashing checks of non-depositors. In the case of an alien or non-resident of the United States, verification must be made by using a passport, alien identification card, or other official document corroborating nationality or residency.

  3. Other key records include:

    1. Credit transactions greater than $2,500

    2. Records used to monitor customers gaming activity (i.e., player rating records)

    3. List of transactions involving monetary instruments of $3,000 and greater

    4. Records of wire transfers involving funds of $3,000 or more

    5. A copy of the casino's written compliance program

    6. Computerized transaction records of casinos with automated record keeping systems

4.88.1.6.4  (01-08-2010)
Compliance Programs

  1. Casinos are required to develop and implement a reasonably designed, written program to monitor compliance with the BSA. At a minimum, the plan must include:

    1. A system of internal controls to assure ongoing compliance

    2. Internal and/or external, independent testing of compliance

    3. Training of casino personnel in BSA requirements

    4. An individual or individuals to assure day-to-day compliance

    5. Procedures for using all available information to determine (when required) accurate customer identity, suspicious or unusual activity, and whether record keeping requirements are met.

  2. For casinos with automated systems, the casino must use the programs to aid in assuring compliance.

  3. ITG cannot make any oral or written statements in regard to the quality or accuracy of a tribe's BSA program. This applies to any informal discussions, BSA outreach events, or BSA compliance checks. ITG's role is simply to provide BSA information to the tribal entity, and make recommendations for possible improvements in their BSA program. Communications, including the closing letter for a BSA Compliance Check, cannot be conveyed in a manner that could be construed to indicate ITG found no problems with the tribe's BSA compliance program. That is a finding that can only be made as the result of a BSA examination by SBSE staff.

4.88.1.6.5  (06-01-2006)
Suspicious Transactions

  1. Casinos have a certain vulnerability to potential money laundering schemes caused by the cash intensive nature of the games. The Bank Secrecy Act was designed to create an audit trail to help minimize illicit financial transactions. Suspicious activities often involve structuring to avoid record keeping and reporting thresholds.

  2. Structuring occurs when a person, alone or with others, conducts or attempts to conduct one or more currency transactions in amounts of $10,000 or less in order to evade the reporting requirements of the BSA. Casinos should be aware that both customers and employees may be involved.

  3. Casinos are required to report all suspicious transactions that involve or aggregate to at least $5,000 in funds or other assets that it knows, suspects, or has reason to suspect is relevant to a possible violation. Possible violations that involve less than $5,000 may be reported on a voluntary basis. FinCEN Form 102 is used to file a Suspicious Activity Report by Casinos (SARC). FinCEN Form 102a provides detailed instructions on when and how to file a report. FinCEN has issued guidance on Suspicious Activity Reporting and preparation, including SARC narrative examples.

4.88.1.6.6  (06-01-2006)
Other Requirements

  1. Currency transactions in other operational aspects of a casino complex may be subject to other reporting requirements:

    1. FinCEN Form 104, Currency Transaction Report - used by independent check cashiers, money remitters, wire transfer companies, etc. operating inside or outside of the casino

    2. IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business - used by the hotel, retail outlets, and other non-gaming departments

4.88.1.7  (01-01-2003)
Distributions of Gaming Revenue

  1. Under the Indian Gaming Regulatory Act, net revenues from any Class II or Class III gaming activities conducted or licensed by an Indian tribe may be used to make per capita payments to members of the tribe only if four conditions are met.

  2. First, the tribe must prepare a plan to allocate revenues only to uses authorized under IGRA. These uses are to:

    1. Fund tribal government operations or programs;

    2. Provide for the general welfare of the tribe or its members;

    3. Promote tribal economic development;

    4. Donate to charitable organizations; or

    5. Help fund operations of local government.

  3. Second, the plan must be approved by the Secretary of the Interior as adequate, particularly with respect to the use of revenues to fund tribal government operations or programs and to promote tribal economic development.

  4. Third, the interests of minors and other legally incompetent persons entitled to receive any of the per capita payments must be protected and preserved and payments are to be disbursed to the parents or legal guardian of such persons as necessary for the health, education, or welfare of the minor or other legally incompetent person under a plan approved by the Secretary and the governing body of the Indian tribe.

  5. Fourth, the per capita payments are subject to federal taxation and the tribe must notify members of such tax liability when payments are made.

4.88.1.7.1  (06-01-2006)
Guidelines on Review and Approval of Per Capita Distribution Plans

  1. In December 1992, the Department of Interior issued "Guidelines to Govern the Review and Approval of Per Capita Distribution Plans" (Guidelines). The guidelines were revised, effective March 17, 2000. These guidelines set forth the procedures regarding the submission, review, and approval of tribal revenue allocation plans or ordinances relating to the distribution of net revenues from a gaming activity. Title 25, Chapter 1, Part 290 contains the revised guidelines. Under the Guidelines,

    1. A tribal revenue allocation plan or ordinance (allocation plan) providing for the distribution of net gaming revenues shall be approved if the allocation plan provides sufficient detail to determine that it complies with the Guidelines and IGRA.

    2. The tribe must provide a percentage breakdown of the uses to which the tribe intends to allocate its net gaming revenues and the allocation plan shall provide that the tribe plans to dedicate a significant portion of its net gaming revenues to one or more of the purposes in 25 U.S.C. section 2710(b)(2)(B).

  2. The Guidelines define "per capita " payments as those payments made or distributed to all members of the tribe or to identified groups of members which are paid directly from the net revenues of any gaming activity.

  3. Per capita payments do not include benefits for special purposes or programs, such as social welfare, medical assistance, or education. Although a tribal member may receive benefits from net revenue for social welfare, medical assistance, or education, the tribe's designation of these payments is not determinative of their tax status.

  4. Under the general welfare doctrine, certain need-based benefits are not taxable. Although there is no express statutory exclusion for a welfare benefit, government disbursements promoting the general welfare of the tribe are not taxable. Thus, a tribal member may receive non-taxable general welfare payments from the tribe. Bannon v. Commissioner , 99 T.C. 59 (1992); Bailey v. Commissioner, 88 T.C. 1293 (1987). See also Rev. Rul. 2005-46, Rev. Rul. 2005-2 C.B.120 (Payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are excluded from gross income under the general welfare extension.)

  5. To qualify under the general welfare exclusion, payments must:

    1. Be made from a governmental fund

    2. Be for the promotion of the general welfare (i.e., generally based on individual or family needs), and

    3. Not represent compensation for services.

  6. Bailey summarizes previous revenue rulings by stating that grants received under social welfare programs that did not require recipients to establish individual need have not qualified for tax exempt status under the general welfare doctrine. Rev. Rul. 76-395, 1976-2 C.B. 16 and Rev. Rul. 76-75, 1976-1 C.B. 14 can be reviewed for further guidance. A key consideration is that the general welfare doctrine requires an individual to establish need.

4.88.1.7.2  (06-01-2006)
Reporting Requirements of Distributions

  1. The Indian Gaming Regulatory Act mandates that the gaming revenue distributions are to be taken into account in computing the income tax of the member. See 25 U.S.C. section 2710(b)(3)(D). For those who receive distributions outright, the year of income inclusion is the year of receipt. See Rev. Rul. 67-284.

4.88.1.7.3  (01-01-2003)
Distributions to Tribal Members

  1. Per capita payments and other distributions are generally made in cash, but also may be in kind, (e.g., services, property, or relief of debt). Identifying the initial source of funds used for the distributions is an important aspect of the reporting and withholding requirements.

  2. Unless specifically exempt from taxation, the amounts that make up the distributions are taxable and subject to the requirements of filing Forms 1099. A distribution could be derived from many sources. Examples include the following:

    1. Distributions of profits from Class II and III gaming activities

    2. Profits from a tribal business other than a Class II or III gaming operation

    3. Interest income on investments

    4. Rental payments from improvements on tribal lands

    5. Revenue sharing programs

  3. All of these payments would require the tribe to prepare a Form 1099 when a payment was made to the tribal member. (Exceptions for nontaxable distributions are discussed below.) Taxable distributions must be included on an individual's income tax return.

  4. If property, services, or relief of debt is received, the tribal member must include the fair market value of the item in gross income. It is only the amount distributed from the net revenues of Class II or III gaming activity, conducted or licensed by such tribe, that is subject to withholding under IRC section 3402(r) . Withholding provisions are discussed below.

4.88.1.7.3.1  (01-08-2010)
Nontaxable Distributions and Benefits

  1. The following items are excluded from the taxable income of individual tribal members:

    1. Income directly derived by the Indian allottee from restricted allotted land that is held in trust by the United States Government;

    2. Income derived from a fishing rights-related activity which is exempt under IRC section 7873;

    3. Income that is exempt under treaty or statute;

    4. Income received from land claim settlements and judgments pursuant to 25 U.S.C. 1401; or

    5. Benefits via certain tribal programs which provide needs-based governmental services.

  2. For a listing and synopsis of Revenue Rulings, Notices, and court cases that can be reviewed for guidance, See Exhibit 4.88.1-3.,General Welfare Exception -- Summary of Authority. When considering such programs it is recommended that tribes discuss this guidance with their assigned ITG Specialist. The facts and circumstances of each tribal program are to be considered on a case-by-case basis. In instances where the law does not clearly address a particular program, IRM 4.88.1.12, PLRs and TAMs should be considered.

4.88.1.7.3.2  (06-01-2006)
Minor Trusts

  1. One of the requirements for the distribution of gaming revenues to tribal members under the Indian Gaming Regulatory Act is that the interests of minors be protected. To meet this requirement, many tribes have established trusts for minors.

  2. Rev. Proc. 2003-14 provides information on trusts established for the receipt of gaming revenue under the Indian Gaming Regulatory Act (IGRA) for the benefit of minors and legal incompetents.

  3. The Revenue Procedure clarifies in which instances the deposits into a trust are taxable at the time the deposits are made, and when beneficiaries must include in gross income amounts transferred to, or earned by, an IGRA trust.

  4. ITG Specialists may want to review the white paper discussion of Rev. Proc. 2003-14 listed on the Government Functions screen of the Technical section of the ITG internal web site. ( http://tege.web.irs)

  5. Tribes considering establishing trusts for minors should take into account the potential tax imposed on certain unearned income of minor children at the allocable parental tax rate. (See IRC section 1(g) and Temp. Reg. section 1.1(i)-IT.).

4.88.1.7.3.3  (01-08-2010)
Withholding from the Distribution of Net Gaming Revenue

  1. As discussed earlier, the provisions of IRC section 3402(r) require withholding from the distribution of net gaming revenue. These requirements are provided to the tribes each year. The tribes are sent a mailing, which includes tables covering the requirements. Also, these tables are included in Publication 15-A , Employer's Supplemental Tax Guide. During outreach visits, compliance reviews, and examinations these tables should be reviewed and discussed with the tribe.

  2. The tribe should be advised that when distributions subject to IRC section 3402(r) are issued at certain intervals and an additional separate payment is made (e.g., bonuses) this additional payment is aggregated with the regular payment for withholding computation purposes.

  3. For example:

    Example:

    A regular monthly per capita payment of $5,000, subject to IRC section 3402(r), is issued to all tribal members. An additional per capita payment of $5,000, also subject to IRC section 3402(r), is made during December. In that instance, for the month of December, the computation for withholding on monthly per capita payments would be based on the aggregate payment amount of $10,000. If the computations were based on separate $5,000 payment amounts, underwithholding would have occurred and the tribe would be potentially liable under IRC section 3402(r).

  4. According to IRC section 3402(r), the tribe is potentially liable for the difference between the amount required to be withheld pursuant to the tables and the amount actually withheld.

  5. In addition, under IRC section 3406 the tribe is potentially liable for backup withholding provisions

4.88.1.7.3.4  (01-08-2010)
Reporting Requirements and Abatement Procedures

  1. Withholding on distributions to tribal members is reported on Form 945. IRM 20.1.4.5 provides information on Form 945, including deposit requirements. Publication 15, Circular E, is a good source on deposit requirements for the tribes.

  2. Form 1099-MISC is filed by the tribe to report distributions to tribal members including cash and the fair market value of any property received.

  3. In addition, each tribal member may be required to submit Form 1040-ES and make quarterly estimated tax payments for taxable distributions received.

  4. See abatement procedures for IRC section 3402(r) assessments under IRC section 3402(d). These provisions are discussed above under Information Reporting. See IRM 4.88.1.3.and IRM 4.23.8.4.

  5. ITG Specialists should also reference the Specialists' Adjustment Desk Guide on the Office Practices and Procedures screen of the Library section of the ITG internal website. http://tege.web.irs.gov/.

4.88.1.8  (01-08-2010)
Tip Agreements

  1. The Tip Rate Determination and Education Program was initiated by the Service to improve and ensure compliance by employees and employers in industries where tipping is customary. If noncompliance exists, both employees and employers can be held liable for payment of significant taxes, penalties, and interest. Under the Tip Rate Determination and Education Program the employer may enter a tip agreement arrangement in order to promote tip compliance and to reduce disputes under IRC section 3121(q).

  2. This section deals with various administrative procedures that are to be followed when processing Indian Tribal Governments (ITG) tip agreements as well as the responsibilities of the ITG Tip Coordinator. See ITG Workflow Diagram, sections C-9, C-9A, C-9B and C-9C for a flow chart outlining the process of the ITG tip program as it is structured in ITG.

  3. Tribal government employers can voluntarily enter into one of four tip agreement arrangements with the Service:

    • the Tip Rate Determination Agreement (TRDA) for the gaming industry,

    • the Gaming Industry Tip Compliance Agreement (GITCA),

    • the Tip Rate Determination Agreement (TRDA) for the food and beverage industry, or,

    • the Tip Rate Determination Agreement (TRDA) for industries other than the food and beverage industries and gaming industry.

  4. Samples of Tip Rate Determination Agreements (TRDA) may be viewed at IRM Exhibit 4.88.1-5 or provided by the ITG Tip Coordinator. Gaming Tip Compliance Agreements (GITCA) are described in Rev. Proc. 2007-32.

  5. Exhibit 4.88.1-4 provides a comparison chart regarding various provisions of the gaming industry TRDA and the GITCA.

  6. Tip Agreements are voluntary. Although tip agreements provide many benefits to both the employees and the employer, some employers may choose not to participate in the program.

  7. Section 3414 of the IRS Restructuring and Reform Act of 1998 prohibits the threat of an audit to coerce taxpayers into signing a TRDA or tip agreement. This prohibition extends to GITCA agreements.

  8. IRC section 3121(q) explains employer liability for FICA taxes on tips. Effective January 1, 1988, IRC section 3121(q) provides that the employers pay their share of FICA taxes on tips reported by their employees. Such remuneration is deemed to have been paid at a time a written statement including such tips is furnished to the employer. If no such statement is furnished (or to the extent the statement is incomplete or inaccurate) such remuneration shall be deemed paid on the date on which notice and demand for such taxes is made to the employer.

  9. Publication 531, Reporting Tip Income provides an informative introduction to the responsibilities of employees regarding tip income.

  10. IRM 4.23.7, Employment Tax on Tip Income, provides additional information on employment taxes and tip income including information on tip agreements.

4.88.1.8.1  (01-08-2010)
Tip Agreement Benefits

  1. Tip agreements provide several benefits to the employer:

    1. Lessen the potential contingent employer liability under IRC 3121(q) for the employer's share of FICA tax on tips

    2. Increase employee compliance with the tax laws

    3. Reduce the burden on employers by establishing rates or methods to ensure that the employees are reporting appropriate tips

    4. Provide that the IRS will not make an assessment against the employer under IRC section 3121(q) while the employer is covered by a tip agreement.

      Note:

      There are two exceptions: assessments on additional tips reported by the employee on Form 4137, Social Security Tax on Tip Income Not Reported to the Employer and attached to the employees Form 1040; and additional tips determined during an employee audit and reported on Form 885-T, Adjustment of Social Security Tax on Tip Income not Reported to the Employer.

  2. Tip agreements also provide many benefits to employees:

    1. Ensure that the IRS will not examine a participating employee's tip income if the employee is reporting tips at or above the tip rate established for their occupational category

    2. Increase employees' compliance with the tax law

    3. Increase reported income

  3. When employees increase reported income they increase any benefits based on income. Among these are:

    1. Improved likelihood of approval when applying for mortgages or car loans

    2. Increased worker's unemployment compensation benefits

    3. Increased Social Security and Medicare benefits

    4. Increased pension, annuity or 401(k) participation

    5. And may increase any other benefit based on income

  4. Tip agreements provide benefits to the IRS:

    1. Result in higher voluntary compliance with tip reporting

    2. Reduce disputes with employees under IR Sec. 3121(q)

    3. Require less IRS enforcement measurement and resources

    4. Lead to better relationships between the IRS and taxpayers

4.88.1.8.2  (01-08-2010)
Tip Rate Determination Agreements (TRDA) Requirements

  1. To participate in a Tip Rate Determination Agreement (TRDA) the employer agrees to comply with certain requirements.

  2. The TRDA details the commitments made by the employer and the IRS upon entering the agreements. Each TRDA also includes definitions, tip rate methods, and miscellaneous provisions.

  3. There are minor variances among the various TRDAs (gaming, food and beverage, and other industries). Some of these variances are discussed below. Refer to the specific TRDA for details.

  4. The authority to sign the TRDA is provided at IRM 4.88.1.8.15.

  5. The TRDA is effective on the first day of the first calendar quarter following the date the Service Representative signs the agreement.

4.88.1.8.2.1  (01-08-2010)
TRDA Required Employer Record Keeping

  1. The employer agrees to maintain specific employee records, detailed in the TRDA, including all records of data used to determine tip rates.

  2. The employer must retain these records for at least 4 years after April 15 following the calendar year to which they relate.

  3. The employer must furnish any of these records plus required annual reports to the Service Representative upon request.

  4. The IRS may evaluate the employer and its participating employees for compliance with the provisions of the tip agreement.

4.88.1.8.2.2  (01-08-2010)
TRDA Annual Reporting and Tax Compliance Requirements

  1. The employer will furnish to the ITG Tip Coordinator an annual report on each nonparticipating employee listing the employee's name, social security number, occupational category, shifts and hours. The report is due on March 31 following each calendar year and may include participating employees as long as all information is included for nonparticipating employees.

  2. If the employer is required to file Forms 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, the employer will furnish copies of the filed forms to the ITG Tip Coordinator.

  3. The employer will comply with all the requirements for filing all required federal tax returns and paying and depositing all federal taxes.

4.88.1.8.2.3  (01-08-2010)
TRDA Internal Revenue Service Commitments

  1. Participating Employee: If the employee reports tips to the employer at or above the agreed rate of the employee's occupational category on a timely filed return, the IRS will not examine a participating employee's tip income for any period for which a Tipped Employee Participation Agreement (TEPA) is in effect.

  2. Employer: Any IRC section 3121(q) notice and demand issued to the employer by the Service Representative shall be based solely on one or more of the following forms:

    1. Form 4137, Social Security and Medicare Tax on Unreported Tip Income, filed by an employee on his or her Form 1040

    2. Form 885-T, Adjustment of Social Security Tax and Income Not Reported to the Employer, prepared at the conclusion of an employee tip examination.

  3. In the event of a termination of the tip agreement, the rule listed at (2) above shall apply to all tips received from the effective date of the agreement to the effective date of the termination.

4.88.1.8.3  (01-08-2010)
TRDA Tip Rates

  1. Depending on the occupational categories and the employer's business practices, tips rates are reported on the agreement using the following types of measurements:

    1. Actual Tips. Actual tips generally refers to an occupational category where pooling of tips is common. Employees in categories where tips are pooled must report the actual tips received and may not use a tip rate. Actual tips may also include occupational categories where strict employer internal controls are in place tracking the tip from the moment the employee receives the tip from the customer until that tip is reported in payroll.

    2. Tip Rates. Tip rates apply to occupational categories where there are no actual tips that may be determined by tip pooling methods or by strong employer internal tracking systems. The rates may be determined as a percentage of sales, a dollar amount per hour, a dollar amount per drink, or other measurable basis.

  2. If the tip rate measurement is used, the employer will determine the rates based on information available to the employer, information provided by the Service Representative, and generally accepted accounting principles. The Service Representative may provide acceptable formulas used to determine tip rates in specific areas, such as McQuatters Formula used to determine tip rates in the food and beverage industry.

  3. The employer will review annually, on a calendar year basis, the tip rates and occupational categories. In addition, the employer may review its occupational categories to ensure that new categories are added and that eliminated categories are deleted. If the employer believes that a revision of rates or categories is appropriate, the employer will submit the proposed revisions to the Service Representative by September 30. For more details on this review process, refer to the TRDA.

4.88.1.8.4  (01-08-2010)
Termination of TRDA Agreement

  1. The employer can terminate the agreement at anytime with written notice. The termination will be effective the first day of the calendar quarter following the date of the notice.

  2. The Service can terminate the agreement with written notice effective on the first day of the calendar quarter following the date of the notice if any of the following conditions exist:

    1. At the end of the calendar year less than 75 percent of the employees in tipped occupational categories are participating

    2. The employer fails to maintain required records

    3. The employer fails to submit the required annual employee report or the Form(s) 8027

    4. The employer fails to make required records available to the Service Representative upon request

    5. The employer fails to file all required federal tax returns and/or fails to make related payments and required tax deposits.

  3. The ITG Director has sole authority to terminate any Indian Tribal Government tip agreement on behalf of the Service.

4.88.1.8.5  (01-08-2010)
Gaming Industry Tip Compliance Agreement Program (GITCA)

  1. The Gaming Industry Tip Compliance Agreement (GITCA) is designed specifically to address concerns of the gaming industry relating to tip income and to reduce disputes under IRC section 3121(q). Some of the basic provisions of the GITCA are listed below. For more details review the model GITCA in Rev. Proc. 2007-32.

  2. To participate in a GITCA the employer agrees to comply with certain requirements.

  3. The GITCA details the commitments made by both the employer and the IRS upon entering the agreement. The GITCA also includes definitions, tip rate methods, and miscellaneous provisions.

  4. The authority to sign the GITCA is provided at IRM 4.88.1.8.15.

4.88.1.8.6  (01-08-2010)
GITCA Employee Participation

  1. A "participating employee" in a GITCA is a tipped employee who:

    1. Signs a Model Gaming Employee Tip Reporting Agreement as provided in Appendix C of the GITCA

    2. Prior to signing the Model Gaming Employee Tip Reporting Agreement filed federal tax returns for the three years prior to the GITCA effective date. The employee must have paid the tax or made arrangements to pay the tax no later than 60 days after signing the agreement

    3. Reports tips at or above the agreed rate on timely filed tax returns

  2. If an employee revokes the Model Gaming Employee Tip Reporting Agreement at any time during the taxable year, the employee will be treated as a nonparticipating employee for the entire year and may not enter into a new Model Gaming Employee Tip Reporting Agreement until January 1 of the following taxable year.

  3. If employee participation is below 75% of the eligible employees, the Service and the employer shall meet to discuss the decline in participation and take appropriate measures to increase the participation rate.

  4. Housekeeping employees may not be included in a GITCA and are not considered eligible employees for the purpose of the agreement.

4.88.1.8.7  (01-08-2010)
GITCA Employer Requirements

  1. The employer agrees to encourage all eligible employees to participate in the program and to sign the Model Gaming Employee Tip Reporting Agreement. It can be seen on IRS.gov as part of Rev. Proc. 2007-32.

  2. The employer shall withhold and pay tax on reported tips and shall include all reported tips on IRS Forms W-2 as required by law.

  3. The employer acknowledges that the Service has the authority to secure the information necessary for the Service to develop the tip rates of nonparticipating employees.

  4. The employer shall maintain certain employee, food and beverage, and tip rate records and make them available to the Service upon request.

4.88.1.8.8  (01-08-2010)
GITCA Required Employer Annual Reports

  1. The employer shall furnish an annual report to the ITG Tip Coordinator with specific information on each nonparticipating employee no later than March 31 for the prior calendar year.

  2. If the employer does not use a certified Employer-Computed Tip Reporting Process (ECTRP), the employer must also furnish an annual report to the ITG Tip Coordinator with specific information on each participating employee no later than March 31 for the prior calendar year. See IRM 4.88.1.8.9 for information on ECTRP.

  3. If the establishment qualifies as a large food and beverage establishment under IRC section 6053, the employer is required to provide certain information annually to the ITG Tip Coordinator no later than the due date for filing Form 8027, Annual Employer Report of Allocated Tip Income.

  4. If the employer provides the information as required in (3) above, the employer shall be deemed to satisfy the requirement to file Forms 8027 with respect to all of its employees.

  5. If the employer has a certified Employer-Computed Tip Reporting Process (ECTRP), the employer shall provide a time-and-attendance system or a payroll processing system report that evidences the tip rates used in the implementation of the agreement and for the preparation of Forms W-2. The report is due to the ITG Tip Coordinator no later than March 31 for the prior calendar year. See IRM 4.88.1.8.9 for information on ECTRP.

4.88.1.8.9  (01-08-2010)
GITCA Employer-Computed Tip Reporting Process (ECTRP)

  1. The Employer-Computed Tip Reporting Process (ECTRP) is defined as a process established, maintained, and controlled by the employer under which time-and-attendance and payroll processing systems are used to compute, without intervention by the employee, the tips reportable by the employee in accordance with the GITCA rates for that employee's occupation and shift.

  2. The tips determined under the ECTRP system will be treated as tips reported to the employer by the participating employee for purposes of reporting, withholding, and paying the applicable taxes.

  3. The employer's process shall qualify as an Employer-Computed Tip Reporting Process upon certification by the employer with the concurrence of the Service that the process satisfies the requirements for the ECTRP listed in the GITCA. The certification form is Appendix E of the GITCA.

4.88.1.8.10  (01-08-2010)
GITCA Tip Examinations of Employees

  1. The Service will not examine a participating employee's tip income for any taxable year that begins after the effective date of the agreement provided that each of the following conditions are met:

    1. The employee is a participating employee for the entire year

    2. The employee reports tips earned during the taxable year at or above the tip rates set for in the agreement or works for an employer who utilizes an ECTRP system.

    3. The participating employee timely files a federal income tax return that reports earned tips and wages on Form W-2.

  2. The Service will not examine a participating employee's tip income for any taxable year that ends on or before the effective date of the agreement if during the prior period the employee met certain conditions clarified in the GITCA.

4.88.1.8.11  (01-08-2010)
GITCA Tip Examinations of Employer

  1. During any taxable year during which the GITCA is in effect the Service may not assert liability against the employer pursuant to IRC section 3121(q) except based on:

    1. the final audit results of a nonparticipating employee

    2. additional tip income reported by an employee.

4.88.1.8.12  (01-08-2010)
Establishing GITCA Tip Rates

  1. GITCA applicable tip rates include the following:

    1. Employees Who Pool Tips. With respect to employees who pool tips, the employees or their group representative shall present to the employer a listing of the actual share of pooled tips received by each employee. If chips are used, the listing must reconcile with the tips presented at the employer's cage for cashing

    2. Other Tipped Employees - Specified Occupational Categories . By agreement between the employer and the Service, tip rates are established for the occupational tip categories listed on Appendix A of the GITCA. These rates specify tips received by the hour, by shift, by drink, by percentage of sales, or other mutually agreed and verifiable bases of measurement.

  2. Mutual Agreement Process. The employer or the Service may propose revisions to the tip rates or occupational categories during the term of the agreement. The non-proposing party will notify the proposing party in writing of approval or disapproval within 60 days of receipt of the proposed revision.

  3. Request for Tip Rate Modification. Upon the occurrence of specific significant events such as a significant change in the business, a 20% decrease in the employer's monthly gross income, or a drop below 50% in the participation rate of any occupational category, the employer may request a modification in the relevant rate that is appropriate in amount and duration.

4.88.1.8.13  (01-08-2010)
Term of the GITCA

  1. The GITCA commences on a date agreeable to both parties and the GITCA terminates no later than 3 years after the initial agreement date.

  2. Beginning no later than 6 months prior to the termination date of the agreement, the Service and the employer shall begin discussions regarding any appropriate revisions to the GITCA.

  3. The Service and the employer by mutual agreement may extend the GITCA termination date by completing the GITCA Appendix D Extension Agreement in order to provide appropriate time to finalize and execute a renewal agreement.

4.88.1.8.14  (01-08-2010)
Termination of GITCA Agreement

  1. The Service may terminate the agreement by written notice if participation falls below 50 % of the eligible employees.

  2. The agreement may be terminated upon the joint agreement of the employer and the Service, without the consent of any participating employee.

  3. If either party fails to comply with any material provision of the agreement, the non-defaulting party may terminate this agreement by giving written notice of termination to the other party.

  4. If the agreement is terminated pursuant to the GITCA's terms, the mutual obligations of the parties shall remain in effect through the effective date of termination.

4.88.1.8.15  (01-08-2010)
Authority to Sign Tip Agreements

  1. The tip agreement must be signed by the tribal representative who has been delegated this authority by the tribal government.

  2. Indian Tribal Government (ITG) Managers have the authority to sign tip agreements on behalf of the Service per Delegation Order 4-34, Gaming Tip Compliance Agreements. See IRM 1.2.43.9.

  3. Two original agreements must be signed. The tribal government retains one copy and the other original is kept in the closed paper tip case file.

  4. The paper tip case file (containing the original signed agreement) is forwarded to ITG Compliance and Project Management (CPM) for review. CPM subsequently closes the paper file tp the ITG Tip Coordinator for review and processing for storage. No historic information will be maintained at the group level.

4.88.1.8.16  (01-08-2010)
Tip Rate Reviews for Tip Agreements

  1. Initial tip rates, and requests to revise existing tip rates, require a validation review by the ITG Specialist. The Specialist will review:

    1. how the rates were determined, and

    2. the related internal and accounting controls

  2. The tribal tipped establishment may use different methodologies to determine tip rates based on available data, formulas, and generally accepted accounting principles. The ITG Specialist can provide suggested formulas, methods, and internal controls for determining reasonable tip rates. Generally, McQuatters Formula should be used for all food and beverage venues which charge tips.

  3. It is highly desirable for the tribal establishment and the ITG Specialist to agree on the methodology for each tipped category prior to the entity setting up the tests and securing the data. This initial step will reduce or eliminate any potential disagreements over the methodology used subsequent to the studies. This step will also reduce time and eliminate the need for initiating additional studies agreeable to both parties.

  4. Tip rates may be based on:

    • a dollar amount per hour with possible shift differentials

    • a dollar amount per beverage served

    • a dollar amount per dealing hour (requires records separating dealing hours from total hours for each dealer)

    • a percentage of sales

    • or some other accurate basis of measurement

  5. Tip rates may also be listed as:

    1. Actual. Actual tip rates require enforced strong internal controls that clearly track the tip from the moment of receipt by the employee to reporting of the tip in control. The internal controls should eliminate any opportunity for the tip to be diverted from the internal control procedures and thereby fail to be reported in payroll.

    2. Actual Pool/Split. Actual Pool/Split rates occur when there is pooling of tips in the occupational category. Employees who pool tips are required to report actual tips and may not use a tip rate as described in (4) above. These employees or their group representative must present to the employer a listing of the actual share of pooled tips received by each employee. If chips are used, the listing must reconcile with the tips presented at the employer's cage for cashing.

  6. The TRDA and GITCA require the employer to retain for each occupational category all records of data used to determine the tip rates. These records should be requested and reviewed by the ITG Specialist.

  7. Tip rate reviews initiated by the Specialist should be done using statistically valid sampling techniques. In some cases the use of a statistically qualified Computer Audit Specialist (CAS) may be necessary.

  8. The internal and accounting controls insure that the tip income under any tip rate methodology is accurately and correctly reported. A copy of the written internal and accounting controls should be obtained and reviewed. In some cases it may be appropriate to test, on a sample basis, the existing controls.

  9. Tip rates that are based on an actual or a pooling method require enforced strong internal controls to ensure that all tips received by the employee are reported in payroll. For example, procedures listed below provide some examples internal control procedures:

    1. Upon receipt of the tip the employee makes an overt sign such as tipping the chip on the dealer's table then immediately clearly depositing the chip in the locked toke box.

    2. The locked toke box can not leave the gaming floor. If the employee leaves the gaming floor during his/her shift, the locked toke box is deposited in a designated area under surveillance

    3. The keys for the toke boxes are located in the Cashier's Cage and are never accessible to the tipped employee.

    4. At the end of the employee's shift, the toke box is taken to the Cashier's Cage for the tokes to be counted and recorded by the cashier under surveillance. Both the cashier and the employee sign the tip report verifying the accuracy of the report.

    5. A copy of the tip report is forwarded to payroll so the tips may be included in the employee's next pay statement.

  10. Some factors that should be considered when reviewing tip rates are:

    1. Type and location of tipped establishment

    2. Customer base and regional economic conditions

    3. Possible shift differentials or seasonal factors

    4. Occupational categories and tip outs

    5. Statistical relationships such as the number of poker hands dealt bears a direct relationship to the number of tips paid. The number of buffet meals served bears a direct relationship to the number of potential buffet tips.

  11. During a rate review, the ITG Specialist shall clearly document by occupational category the methodology and data used to determine the tip rate for that occupational category in the work papers. The work papers shall be submitted to the ITG Group Manager for review.

  12. The work papers must stay with the case file until the documentation is no longer relevant for determining the appropriate tip rate for an occupational category or as a basis for a nonparticipating employee tip audits.

4.88.1.8.17  (01-08-2010)
The Tip Case File and CPM Review

  1. For ITG tip agreement cases issued to the field prior to 01-01-2008, the proposed draft agreement with supporting documentation must be sent electronically or by mail to CPM for pre-review prior to securing a designated tribal representative's signature on the new or revised agreement. CPM will concur or provide suggested changes. The ITG Specialist will work with CPM to resolve all issues. If there are unresolved issues, the Group Manager and the ITG Tip Coordinator will assist in resolving any remaining issues.

  2. When the final agreement is presented to the tribe for signature, a reasonable amount of time for tribal review and signature should be specified and communicated to the tribe. If the signed agreement has not been received within that time frame, consideration should be given to issuing a declination letter.

  3. Once the agreement is secured, the completed tip case electronic file will be closed to the ITG Tip Coordinator. The Tip Coordinator will secure necessary data from the file and forward the electronic file to CPM Review. Any paper tip case file including the original signed agreement will be closed directly to CPM Review.

4.88.1.8.18  (01-08-2010)
Role of ITG Tip Program Coordinator

  1. The Indian Tribal Governments (ITG) office created the position of ITG Tip Compliance Coordinator (Tip Coordinator) to oversee the ITG Tip Program and to work directly with the tribes on issues that arise after both parties have entered into a tip agreement.

  2. The ITG Tip Coordinator also coordinates with other IRS Divisions and Campuses on tip related issues to ensure consistency and to clarify areas where the approach may be different due to the variance in the customer base.

  3. A primary goal of the Tip Coordinator is to ensure that all parties (the tribes, their employees, and the Service) adhere to the agreements. This generally involves monitoring annual reports required by the tip agreements, assisting ITG field employees, referring nonparticipating tribal employees for audit, and issuing notice and demands to tribal tipped entities based on the results of their employee audits.

  4. The ITG Tip Coordinator reviews internal data and selects tip case work for the field. In addition, the Tip Coordinator analyzes each case prior to issuance to the field. The Tip Coordinator prepares spreadsheets and other case building documents for the file before it is issued to the field.

  5. The ITG Tip Coordinator is responsible for updating the ITG Tip Database and for notifying management regarding trends or issues with the ITG Tip Program.

  6. The role of the Tip Coordinator in no way interferes with the duties and responsibilities of the ITG Specialists. Any requests for assistance from the tribes that cannot be adequately handled by the ITG Tip Coordinator will be referred to the appropriate field group for assignment to an ITG Specialist.


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