Industry representatives estimate that 175,000 to 200,000 U.S. places of business have workers that collect tips. Multiply that number by the number of tip-collecting employees at each one and you’ll understand why the Internal Revenue Service (IRS) is interested in what happens to the tips left by customers. Many of these tips find their way into the pockets of wait staff and bartenders, valets and hair stylists, among other occupations, but never find their way onto an income tax statement. In another attempt to recover this unreported income, the IRS is introducing a three-year pilot, the Attributed Tip Income Program (ATIP), which begins January 1, 2007, for food and beverage (F & B) employers.

"The IRS has been charged with closing the tax gap. Developing programs that increase compliance is a step in that direction. This program should be looked upon as a less burdensome way for employers to comply with the tip reporting rules," explains Cindy Hockenberry, enrolled agent and NATP Tax Information Analyst.

• ATIP abolishes daily record keeping of tips; employees simply need to sign an agreement with their employer to participate in ATIP. The employer does the rest.
• Because tips are reported as income, they increase the amounts going into employee benefit plans such as social security, unemployment funding, retirement plans, and worker’s compensation.
• A larger reported income (by including tips) can increase the ability to obtain loans.
• Employees receive the benefit of audit protection for tip reporting during the time they participate in and comply with ATIP rules. In the past, not reporting tips left many workers vulnerable to audit and subsequently, a tax burden that few could afford to meet.

• Employers receive audit protection for tip reporting while using and complying with ATIP; a big consideration because of hefty penalties (50 to 100 percent) and even criminal sanctions if they willingly underreport.
• Simplified use of a tip-reporting formula means in most cases, employers no longer need to receive and process tip records from participating employees. Employers simply handle the tip amounts as wages.
• Easy enrollment procedure allows employers to simply elect participation in ATIP by checking a designated box on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, and having participating employees sign a letter of agreement. Two similar programs introduced previously by the IRS required meeting face-to-face with IRS agents, determining a rate, and signing agreements before using a tip reporting program. They also required employers to collect tip records from employees and submit reports to the IRS. ATIP abolishes the meeting with the IRS, handling employee records, and frequent reporting.

• ATIP is a three-year pilot program beginning January 1, 2007, only for food and beverage workers (the largest industry segment of tipped employees).
• At least 20 percent of gross receipts of the establishment must be charged on credit cards with the tip amounts shown. Receipts must be retained for four years.
• The employer elects annually to participate by checking the ATIP participation box on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. An alternate simplified method is available for small employers not filing Form 8027.
• Charged tip rate is based on information from gross F & B sales on the establishment’s Form 8027 from the prior year. Using ATIP, the employer uses a formula taking the aggregate of charged tips for all participants, and deducts two percent (in consideration of lower cash tips). The end-result is reported as income for each participating employee. No meeting with the IRS is necessary for determination.
• A minimum of at least 75 percent of employees must elect to participate, and employee election is voluntary. Each participant will need to sign a letter of participation. This can include any tip-receiving staff, whether they directly or indirectly receive tips.
• The employer withholds taxes on the tip amount (now included as wages) for each participating employee.
• Tips attributed to each employee are recorded on the employee’s Form W-2.