Tax Administration:

Tip Income Reporting Can Be Increased

GGD-86-119: Published: Sep 30, 1986. Publicly Released: Oct 14, 1986.

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In response to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) efforts to improve tip income reporting and the impact of the Tax Equity and Fiscal Responsibility Act's (TEFRA) tip income reporting requirements on both the food and beverage industry and tip income reporting.

GAO found that: (1) of the four IRS regions it visited, two were more active and successful in pursuing tip income nonreporting than the others; (2) tip income reporting has increased since the implementation of the new TEFRA reporting requirements; (3) food and beverage employers indicated that implementation of these new reporting requirements was not as costly as they originally projected; and (4) IRS districts used varying procedures in administering the TEFRA provision, which allowed employers a rate reduction from the reporting of 8 percent of gross receipts, which could result in inequitable treatment of taxpayers.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The study has been completed and approved by the Treasury. The Commissioner has signed the report. A report outlining IRS strategy was released in December 1990.

    Recommendation: To enhance IRS efforts to improve compliance with the requirements for reporting tip income, the Commissioner of Internal Revenue should formulate and implement an overall strategy for identifying and reducing tip income nonreporting. In formulating this strategy, the Commissioner should, in conjunction with providing TEFRA tip income information to the regional and district offices: (1) identify and evaluate, for IRS-wide applicability, those detection techniques and tools which have been proven effective in conducting tip income reporting projects and communicate this information to all IRS regions and districts; and (2) design and implement an overview and evaluation process to monitor the progress of tip enforcement activities, identify potential problem areas, and devise the actions needed to deal with them.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS implemented this recommendation by: (1) issuing instructions on evaluating information; and (2) requiring regions to more closely monitor the appeals process. An Internal Revenue Manual Transmittal, which provides broad guidelines for district office personnel to follow in evaluating tip rate reduction requests from employees, was issued on February 19, 1987.

    Recommendation: To reduce the inconsistencies in the rate reduction process, the Commissioner of Internal Revenue should: (1) establish uniform criteria and standard procedures for reviewing employers' requests for a reduction from the reporting of 8 percent of gross receipts as tip income; and (2) monitor the implementation of the review process to ensure a reasonably consistent IRS-wide approach.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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