The IRS's efforts to improve reporting of tip income

The Treasury Inspector General for Tax Administration (TIGTA) concluded in a 2018 report that the Internal Revenue Service (IRS) is not fully addressing billions of dollars in tip income reporting noncompliance and is generally not enforcing the tip agreements it has in place. The IRS has limited resources and is having great difficulty in keeping up with the size and rapid growth in tipping industries, particularly the food and beverage industry. The IRS relies primarily on voluntary tip reporting agreements with businesses, rather than on employer tip audits, to combat nonreporting of tips. Despite a higher risk of noncompliance where no tip agreement exists, there is little incentive for businesses to enter into tip agreements with the IRS because the risk of a tip examination is very low. Following recommendations in the 2018 TIGTA report, the IRS agreed to focus more of its revenue agent resources on conducting audits instead of revising terms of low-risk tip agreements. This article provides a historical perspective of the steps taken by the IRS and Congress to increase tip reporting compliance and the IRS's efforts to quantify underreported tip income, an explanation of the current tip reporting rules, and a discussion of the adequacy of the current rules to address tip income reporting noncompliance.