Billions in Tip-Related Tax Noncompliance Are Not Fully Addressed and Tip Agreements Are Generally Not Enforced

The Commissioner, Small Business/Self-Emplyoyed Division, should use a risk-based approach to more effectively prioritize the use of Field Examination resources for the NTRCP. The risk-based approach should prioritize higher risk work with the greatest impact to tip reporting compliance.

The Commissioner Small Business/Self-Employed Division, should ensure that NTRCP examiners consider extending the renewal term for employers with GITCAs when annual monitoring indicates they are compliant with payment and reporting compliance so that resources can be used for higher risk work.

The Commissioner, Small Business/Self-Employed Division, should use data analysis and sampling to monitor tip agreement compliance and identify taxpayers that need a compliance review. For example, the IRS could focus on the tip agreements with projected unreported tips with a high dollar value.

The Commissioner, Small Business/Self-Employed Division, should develop a risk-based case selection methodology using historical statistics and data analysis to identify the highest risk tip examination cases on an annual basis. For example, the IRS could focus on taxpayers with projected unreported tips in a high dollar value. The cases could then be classified based on the updated prioritization of Field resources available for tip examinations.

The Commissioner, Small Business/Self-Employed Division, should use the National Tip Reporting Compliance Program (NTRCP) Centralized Employment Tax Operations (CETO) function to complete the Notice and Demand letter process for closed tip examinations when Field Examination resources are limited. The CETO function already performs this work for the Form 4137 tip compliance workstream, so it would not be a new process for them.