We are former IRS agents, managers and teaching instructors. We have worked in the IRS audit and collection divisions. We have over 230 years of direct tax experience in over 100 years of working directly for the Internal Revenue Service.
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You will find enclosed the report of the treasury internal general and regarding the state of IRS tax audits and the many noncompliance issues they have.
Tips are considered wages and are subject to employment taxes including Federal Insurance Contributions Act, Federal Unemployment Tax Act, and Federal income tax withholding.
If the IRS does not enforce underreported tip income by employees and employers, it is unfair to those taxpayers who do report and pay tax on tip income accurately.
WHY TIGTA DID THE AUDIT
The IRS estimates that 10 percent ($23 billion) of the estimated 2006 individual income tax underreporting Tax Gap ($235 billion) is due to unreported tip income by employees. The overall objective of this audit was to determine whether the IRS is using the National Tip Reporting Compliance Program (NTRCP) to provide balanced and adequate reporting compliance oversight of taxpayers in industries in which tipping is customary.
WHAT TIGTA FOUND
The NTRCP prioritized the renewal of lower risk Gaming Industry Tip Compliance Agreements (GITCA) and Tip Rate Determination Agreements (TRDA) over higher risk compliance reviews of Tip Reporting Alternative Commitment (TRAC) agreements and tip examinations. Since Fiscal Year (FY) 2013, the NTRCP completed 875 GITCA and TRDA renewals compared with 262 tip examinations and 53 TRAC reviews.
TIGTA determined that 1,971 (30 percent) of the 6,513 businesses with tip agreements that also filed taxes during Tax Year 2016 had projected unreported tips of nearly $1.66 billion. Employers with TRAC agreements accounted for 815 (41 percent) of this noncompliance, involving almost $1.2 billion (72 percent), including 47 full-service restaurants that potentially underreported by over $1 million each.
he IRS provided tip income audit protection to these potentially noncompliant businesses and employees.
There is an even higher risk of tax noncompliance for employers in tipping industries that do not have a tip agreement. TIGTA identified 15,771 employers with $6.3 billion in projected unreported tip income for Tax Year 2016, including 676 employers who underreported by over $1 million. Meanwhile, the NTRCP completed only 34 tip examinations of employers in FY 2016.
IRS management believes that focusing on the renewal of GITCAs allows them to reach and maintain compliance for a large number of employers and their employees all at once. However, TIGTA determined that **1** of 10 randomly sampled FY 2017 GITCA and TRDA renewal reviews resulted in either no change to the tip rates or a reduction by an average of 17 percent.
In addition, unlike TRACs, GITCA and TRDA employers must submit annual reports that the NTRCP can use to assess the risk of noncompliance.
TIGTA’s review of the 10 most recently completed tip agreement compliance reviews showed that the NTRCP examiners had documented at least one reason to revoke the tip agreements in **1** cases, but the agreements were not revoked. The NTRCP has revoked only 13 tip agreements since FY 2013.
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