Every restaurant owner who has read about aggregate tip assessments eventually asks the same question. Is there a way to get the IRS to agree, up front, that if I run a clean tip reporting system, it will not come after me for tips my staff failed to report?
There has been. There may be again. Right now, it depends on whether you already have an agreement.
What these agreements protect against
Under IRC 3121(q), tips are deemed paid by the employer for the employer share of FICA under IRC 3111. When tips go unreported, the IRS can make notice and demand on the employer for its share, and the Supreme Court has allowed the IRS to estimate unreported tips in the aggregate. We cover that exposure in our guide to aggregate tip assessments.
The voluntary agreement programs trade compliance commitments for protection from that section 3121(q) exposure. Notice 2023-13 describes the existing TRAC, TRDA and EmTRAC programs as providing a commitment that the IRS would protect the employer from section 3121(q) liability by not initiating tip examinations of the employer for periods in which the agreement was in effect.
The programs that exist today
The IRS's tip recordkeeping guidance lists three voluntary tip reporting agreements available through its Market Segment Understandings program and points employers to Publication 3144:
- TRAC, the Tip Reporting Alternative Commitment.
- TRDA, the Tip Rate Determination Agreement.
- GITCA, the Gaming Industry Tip Compliance Agreement.
There is also EmTRAC, the Employer-Designed Tip Reporting Program, described in Notice 2001-1.
How TRAC works
According to the background in Notice 2023-13, TRAC agreements have been offered to food and beverage employers since 1995. They do not require reporting at an agreed tip rate. They require the employer to run an educational program for tipped employees and to establish a procedure, at least monthly, for preparing a written or electronic statement of all tips attributable to each employee's services. EmTRAC is similar, but lets the employer design its own education and reporting procedures for IRS approval.
How TRDA works
Under a TRDA, the IRS and the employer agree on tip rates for the employer's occupational categories. Employees sign Tipped Employee Participation Agreements and report tips at or above the agreed rates. Notice 2023-13 says the TRDA proposals included protection for employees who reported at or above the established rate.
The door closed in March 2023
This is the part most owners have not heard. Notice 2023-13 states that the IRS will not enter into any new TRAC, TRDA or EmTRAC agreements with employers that did not already have one as of March 8, 2023. Employers with existing agreements continue under Announcement 2001-1 and Notice 2001-1 until a final replacement is published.
If you have a TRAC or TRDA from before that date, keep it in force. Read it. Comply with it. It is worth more today than when you signed it, because a new restaurant cannot get one.
The proposed replacement: SITCA
Notice 2023-13 set out a proposed revenue procedure for the Service Industry Tip Compliance Agreement program. It would be the single tip compliance program for service industry employers, excluding gaming employers, and would replace TRAC, TRDA and EmTRAC. The notice requested comments by May 7, 2023. In the tax-law research database I use, Notice 2023-13 is still listed as current guidance; check the IRS website for whether a final revenue procedure has been issued before relying on any of the proposed terms below.
Who could participate
Under the proposal, an employer must be in a service industry where customer services generate sales subject to tipping, have at least one "Covered Establishment" operating under its EIN, and be compliant with federal, state and local tax laws for the three completed calendar years before applying, plus the quarters since.
What a covered establishment needs
- Tipped employees who report tips under section 6053(a) through a technology-based time and attendance system.
- A point-of-sale system that records all sales subject to tipping and accepts the same forms of electronic payment for tips as for sales.
The annual test
This is the heart of the proposal. Each year, reported tips at each covered establishment must meet or exceed the sum of all charged tips shown in the POS system plus an estimate of cash tips. The cash estimate uses three IRS-published rates: a minimum charge tip percentage, a cash differential and a stiff rate. The employer files an annual report showing the test was met.
Fail the test and the establishment is removed from the program retroactively to the start of that year, loses section 3121(q) protection for that year and generally cannot be reinstated until it shows three completed calendar years of meeting the requirement.
What changes for employees
SITCA would drop employee participation agreements and the employee audit protection that came with TRDA and, informally, TRAC. Employees would still be required to report actual tips under section 6053(a). The protection would belong to the employer only.
Transition for existing agreements
Under the proposal, existing TRAC, TRDA and EmTRAC agreements would stay in effect until the earliest of the employer's acceptance into SITCA, an IRS determination that the employer is noncompliant with its agreement, or the end of the first calendar year beginning after the final revenue procedure is published.
The IRS cannot strong-arm you into an agreement
A statutory note to IRC 6053, from section 3414 of the IRS Restructuring and Reform Act of 1998, directs the IRS to instruct its employees that they may not threaten to audit a taxpayer to coerce it into a Tip Reporting Alternative Commitment agreement. These programs are voluntary. If you are being told otherwise, write down who said it and when.
If you already have a TRAC or TRDA
An existing agreement is protection you cannot replace today, so treat it like an asset. Pull the signed agreement and list every obligation in it. Under TRAC that means the employee education program and the at-least-monthly tip statements. Under a TRDA it means the agreed tip rates by occupational category and the employee participation agreements.
Then test yourself. Notice 2023-13 says the transition protection for existing agreements lasts only to the extent the employer stays compliant with the terms of its agreement, and an IRS determination of noncompliance ends it. It also cites a 2018 Treasury Inspector General for Tax Administration review that concluded the IRS was extending tip audit protection to potentially noncompliant employers and rarely revoking agreements. Read that as a warning. If the IRS reviews your agreement, you want a file that proves compliance, not one that proves you signed something years ago.
Read the agreement's scope language carefully, including which establishments and periods it covers. Under the proposed SITCA rules, protection would apply only to establishments approved for the program and only for approved periods. Do not assume any agreement covers more than it says.
If you do not have one
You are in the same position as most restaurants: no agreement available today and full exposure under section 3121(q) if tips go unreported. The practical response is to build the records SITCA would require anyway. A POS system that captures charged tips, a time and attendance system where employees enter cash tips at clock-out, and a year-end comparison of reported tips to charged tips plus a cash estimate. If a final program arrives, you will be ready to apply. If it never does, you will have the evidence to fight an aggregate estimate.
Should you want one?
If SITCA is finalized as proposed, the honest answer is that it rewards restaurants that already report well. Its annual test is essentially a self-administered version of the aggregate tip computation an examiner would run. If your reported tips already clear charged tips plus a reasonable cash estimate, the program would turn that compliance into protection. If they do not, applying would only put the gap in writing.
Either way, the work is the same: a POS system that captures charged tips cleanly, clock-out tip entry for cash, and payroll that runs every reported dollar. Our guides to the owner's tip reporting duties and Form 8027 and tip allocation cover the mechanics. For help evaluating an existing agreement or a tip compliance problem, see the firm's small business IRS problems guide.
An agreement is only as good as the reporting behind it. Fix the reporting first, then talk about paper.