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

The Commissioner, Small Business/Self-Employed Division, should update the Tip Examination IRM to clarify the requirements for making a determination and documenting the reasons to expand or limit the scope to prior and/or subsequent years. The documentation should include the use of further analysis to justify the reason for expanding or limiting the scope of the audit to prior/subsequent years.

The Commissioner, Small Business/Self-Employed Division, should consider reducing the number of approvals necessary to revoke tip agreements with noncompliant employers.

The Commissioner, Small Business/Self-Employed Division, should update the Internal Revenue Manual (IRM) to provide more specific criteria and examples of when to revoke a tip agreement if an establishment is substantially noncompliant with the commitments of the agreement and to provide more specific criteria and examples on how to perform compliance reviews, including the Form 8027 analysis of unreported tips. Provide employee training on the changes to the IRM.

The Commissioners, Small Business/Self-Employed and TE/GE Divisions, should ensure that Form 4137 Compliance cases are addressed in the CETO function's annual work plans, including the TY 2013 through 2015 cases, which involved more than $1.5 million in potential increased FICA tax revenue