Executive Summary

Objectives and Scope

Background

Results

Conclusion

Appendix I – Detailed Objectives, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Management’s Response to Draft Report

Executive Summary

Tips to employees, such as waiters and waitresses in restaurants, are taxable income. These employees are required to report their tip amounts to their employers, who are then required to report the amount of the tips to the Internal Revenue Service (IRS). Traditionally, a significant amount of non-compliance occurs in tipping-related industries. A recent IRS study determined that the amount of tip income voluntarily reported in 1993 was less than half of the true tip amount, leaving over $9 billion of unreported tip income.

To address non-compliance, the IRS began the Tip Rate Determination and Education Program (Tip Program) in October 1993. This program is intended to be a non- enforcement method to increase tip-reporting compliance. The program is designed to have IRS field personnel make contact with individual restaurants in order to secure Tip Rate Determination Agreements (TRDA) or Tip Reporting Alternative Commitment (TRAC) Agreements. The TRDA requires the IRS and employer to work together to determine a mutually agreed upon amount of tips that employees generally receive and should report. TRAC Agreements require employers to emphasize education on the responsibilities of tip reporting to their employees.

The IRS identified the Tip Program as one of its seven National Compliance Strategies in 1997, and this strategy has continued through 2001. The Tip Program has three objectives:

• To increase the filing of Employer’s Annual Information Return of Tip Income and Allocated Tips (Form 8027).
• To increase tip reporting by employers on their Employer’s Quarterly Federal Tax Return (Form 941), and by employees on their Individual Federal Income Tax Return (Form 1040).
• To increase collection results from improved reporting.

The objectives of our review were to determine whether the Tip Program achieved its goal of effectively increasing taxpayer compliance, and whether the program violated taxpayers’ rights.

The amount of tip income reported to the IRS has consistently increased during the past 5 years. While we identified no instances in which the program violated taxpayers’ rights, additional enhancements could be made to increase compliance, provide more consistent use of the program, ensure that the program is properly implemented in the new IRS organization, and expand the program to other industries.

According to statistics gathered by the IRS’ Office of Employment Tax Administration and Compliance, total tips reported on both Forms 941 and 8027 grew dramatically from 1994 to 1998, reaching $11.9 billion in 1998 on Forms 941and $7.03 billion on Forms 8027. During that same period, the number of Form 8027 filers grew slightly. While other reasons, such as an improved economy and more restaurants, likely contributed to the increase, the program appears to have had an impact on increased compliance. However, the IRS has no method to determine what amount of the increase was actually due to the implementation of the program.

The IRS has no process in place to identify all business entities that may be required to file Form 8027. These businesses are also required to file Form 941 and include the amount of tip income received by employees. The Form 8027 is the recommended tool to identify restaurant establishments where tipping is customary and to ensure continued compliance in tip reporting. Through September 7, 2000, taxpayers filed 57,902 Forms 8027 for calendar year 1999. Because of late filings and filing errors, 3,091 (5 percent) of these forms were not included in the database distributed to the Examination function’s district offices. Therefore, these filers will not be included in the subsequent year’s Form 8027 database, which the district offices use to identify potential non-compliant taxpayers.

The accuracy and completeness of two of the databases the IRS used to monitor the results of the program could be improved. In particular, there were 672 establishments listed as having agreements in the Form 8027 database, which were not listed as having an agreement in the separate National TRAC/TRDA database. Inaccurate and incomplete management information can adversely affect program decision-making.

Use of the Tip Program varies by district depending upon the resources applied to the program, district management prioritization, and practices used. Specifically, the number of restaurants with agreements ranged from 77 in 1 district to 613 in another district, and the number of examinations of employee tax returns ranged from 1 to 176. One of the three districts reviewed did not use the Form 8027 database as a primary source in determining potential non-compliance as recommended. One district only offered the TRAC but did not offer the TRDA Agreements, while the other two districts offered both types of agreements; however, one of those districts has not secured a TRAC or TRDA agreement in over two years. A contributing factor to these inconsistencies is that program oversight was limited to two National Headquarters program analysts, one responsible for the restaurant industry and the other for the hair and beauty industry. Without a consistent approach to using agreements and conducting examinations when necessary, the success of the program is not being maximized and taxpayers are not treated equally.

The newly established Small Business/Self-Employed (SB/SE) Division includes a Taxpayer Education and Communication (TEC) function that is responsible for outreach activities relating to developing new, and maintaining existing, voluntary agreements for small business taxpayers. However, the TEC function has neither immediate plans nor adequate personnel to ensure the smooth transition of the Tip Program from the Division’s Compliance function. In addition, TEC function officials do not know who will monitor and solicit future tip agreements that affect other IRS operating divisions. Finally, the TEC function anticipated hiring 215 employees by January 2001, and plans to be fully staffed by October 2002. At least some of these employees will be immediately responsible for assisting taxpayers during the "filing season" (the first three and one-half months of each calendar year), thus limiting their ability to solicit new and monitor existing agreements during this period.

The IRS would like to further extend the Tip Program to all other industries where tipping is customary; however, actual time frames are yet to be determined for initiating these other programs. A significant challenge this expansion faces is that current activities within the Tip Program generally overlook contacting and executing agreements with small establishments, as this process is time and labor intensive. There is no national policy concerning a minimum employee threshold level. In fact, our review identified one district excluding restaurants with less than 50 employees from participation in the program. This practice of excluding very small restaurant businesses seems to contradict the stated expansion plans of the program to other industries, such as beauty and hair care, which are usually very small business establishments with few employees. Additionally, only restaurants with 10 or more employees are required to file Form 8027. These systemic limitations will further complicate the ability to identify non-compliant businesses that are small.

The Commissioner, SB/SE Division should work with the Business Systems Modernization Office’s Change Control Board to include an automated reconciliation of Forms 941 and 8027 data to identify non-compliance in tip reporting and improve the accuracy of management information data. In addition, the importance of the Tip Program needs to be re-emphasized and adequate oversight needs to be provided. The Directors for TEC and Compliance need to develop a detailed plan to ensure the smooth transition of the Tip Program from the Compliance function to the TEC function in order to maintain continuity of the program and avoid taxpayer burden. Finally, the Commissioner, SB/SE Division should address concerns with the future strategy on expanding the Tip Program to other industries which customarily receive tips.

Management’s Response: IRS management agreed with our recommendations and has initiated corrective actions that address the issues we identified. A complete copy of the response is attached to this report in Appendix IV.

Objectives and Scope

The objectives of our review were to determine whether the Tip Rate Determination and Education Program (Tip Program) achieved its goal of effectively increasing taxpayer compliance, and whether the program violated taxpayers’ rights.

To accomplish these objectives, we determined whether the:

• Internal Revenue Service (IRS) monitored the Tip Program’s effectiveness.
• National Headquarters ensured that key district summary management information system data was accurate to enable the Small Business/Self-Employed (SB/SE) Division to measure the success of the Tip Program.
• IRS was threatening taxpayers it contacted for examination and if taxpayers were unknowingly allowing de facto examinations when entering agreements.
• The Tip Program increased taxpayer compliance in tip reporting.
• The IRS’ plan for separating the Tip Program between the SB/SE Division’s Taxpayer Education and Communication (TEC) and Compliance functions considered the potential effects on taxpayer burden and program efficiency.

We conducted fieldwork in the National Headquarters and in the Manhattan, Georgia and Houston Districts between August and December 2000.¹ We primarily limited the scope of our review to the restaurant industry. This audit was performed in accordance with Government Auditing Standards.

Details of our audit objectives, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

Tips to employees, such as waiters and waitresses in restaurants, are taxable income. These employees are required to report their tip amounts to their employers, who are then required to report the amount of the tips to the IRS. Traditionally, a significant amount of non-compliance occurs in tipping-related industries. A recent IRS study² determined that the amount of tip income voluntarily reported in 1993 was less than half of the true tip amount, leaving over $9 billion of unreported tip income.

To address non-compliance, the IRS began the Tip Program in October 1993. This program was designed as a non-enforcement method of increasing tip-reporting compliance and requires IRS district personnel to make contact with individual restaurants in order to secure Tip Rate Determination Agreements (TRDA) or Tip Reporting Alternative Commitment (TRAC) Agreements. Furthermore, the IRS identified this area as one of its seven National Compliance Strategies in 1997, and this strategy has continued through 2001.

The Tip Program has three objectives:

• To increase the filing of Employer’s Annual Information Return of Tip Income and Allocated Tips (Form 8027).
• To increase tip reporting by employers on their Employer’s Quarterly Federal Tax Return (Form 941), and by employees on their Individual Federal Income Tax Return (Form 1040).
• To increase collection results from improved reporting.

Under this program, employers agree to voluntarily participate in either a TRDA or a TRAC Agreement. A TRDA requires the IRS and the employer to work together to determine a mutually agreed upon amount of tips that employees generally receive and should report. TRAC Agreements require employers to educate their employees on the responsibilities of tip reporting.

The Form 8027 is an annual information return required from large food and beverage establishments. These establishments are defined as ones that serve food and beverages, customarily encourage tipping the employee, and employ 10 or more servers collectively working 80 hours or more during a typical business day. The purpose of Form 8027 is to provide a process whereby large food and beverage establishments can report both receipts from food and beverage operations and tips reported by employees.

Results

The amount of tip income reported to the IRS has consistently increased during the past 5 years. While we identified no instances in which taxpayers’ rights were violated because of the program, enhancements could: increase compliance, provide more consistent use of the program, and ensure that the program is properly implemented in the new IRS organization. In addition, the expansion of the Tip Program to other industries has some limitations.

The Tip Program Appears to Have Contributed to an Increase in Reported Tip Income

According to statistics gathered by the IRS’ Office of Employment Tax Administration and Compliance (OETAC):

• Total tips reported on Form 8027 increased from $4.7 billion in 1994 to $7.03 billion in 1998.
• Total tips reported on Form 941 increased from $8.5 billion reported in 1994 to $11.9 billion in 1998.
• The number of Form 8027 filers grew from 55,793 in 1994 to 56,468 in 1998.

While other reasons such as an improved economy and more businesses have undoubtedly contributed to the increase, the Tip Program appears to have had an impact on increased compliance, as well. However, the IRS has no method to determine what amount of the increase was actually due to the implementation of the program.

The Tip Program Does Not Identify Some Employers Required to Report Tips

As previously stated, employees are required to report their tip amounts to their employers, who are then required to report the amount of the tips to the IRS.

The IRS maintains a database of businesses that file Form 8027. These businesses are also required to file Form 941. Districts use the Form 8027 database as a source for determining potential non-compliance in tip reporting by restaurants, as well as monitoring overall program efficiency.

While the IRS estimates that approximately 25 to 30 percent of businesses that should file Form 8027 do not do so, the SB/SE Division has no process in place to identify all entities which may be required to file it. Furthermore, there are no procedures to reconcile data from Form 8027 to Form 941. Finally, there are some inaccuracies in the Form 8027 database.

IRS Program Analysts stated that as of September 7, 2000, taxpayers had filed 57,902 Forms 8027 for calendar year 1999. However, the Form 8027 database distributed to the Examination function’s district offices in July 2000 included only 54,811 Forms 8027. The 3,091 (5 percent) other forms were not included in the database because they were filed late or contained incorrect entries. As a result, these filers will not be included in the subsequent year’s Form 8027 database, resulting in a temporary omission of potentially non-compliant taxpayers from the compliance program.

Also, the IRS does not match and reconcile Forms 941 and 8027. Therefore, employers could file a Form 8027, but not report taxable tip income on Form 941. On the other hand, employers could file the Form 941 but not the required Form 8027, which the IRS needs to determine the accuracy of tip income on the Form 941.

In June 1998, IRS management submitted a Request for Information Services (RIS) for the development of an Office of Employment Tax Administration and Compliance Customer Service System. As proposed, this system would assist the Tip Program in incorporating certain IRS databases with real time linkages, allowing for research and analysis, taxpayer education/outreach, reports generation, and a number of other features. Examiners in the Tip Program would be able to add, append, and edit records, and perform analyses with download capability. This RIS would also have provided for the reconciliation of the Forms 941 and 8027.

Due to other higher priorities and the pending IRS modernization efforts, Information Systems did not make the programming changes requested in the RIS. In addition, the IRS modernization teams did not include this area in their Modernization Blueprint.

Reliable management information is necessary to effectively manage a compliance program. Inaccurate and incomplete management information can adversely affect program decisions. Our review raised questions about the degree of accuracy and completeness of two important Tip Program data files.

The Examination function Tip Coordinator in one of the districts alerted us to errors in the Form 8027 database. Although we did not perform substantive testing of the database, our review confirmed the following types of errors.

• There were 672 establishments listed as having agreements in the Form 8027 database, which were not listed as having an agreement in the separate National TRAC/TRDA database.
• One establishment was listed twice on the Form 8027 database.

These errors represent a small portion of the overall database, and we are not projecting these results for the entire population. However, management information is most beneficial when it is accurate and complete.

Due to the volume of data represented in the database and the absence of reconciliations between the TRAC/TRDA and the Form 8027 databases, we were unable to test for further errors. However, similar problems may exist in other districts’ databases.

In addition, the number of tip agreements and establishments in district level records differs from that in records at the National Headquarters. The National Headquarters analyst receives quarterly updates on the TRAC/TRDA Agreements secured and terminated. Our review identified the following discrepancies.

These data discrepancies went undetected because management did not have a process in place to ensure the validity of the databases. The data is much too voluminous for the analyst to manually reconcile, and no automated reconciliation exists.

The Commissioner, SB/SE Division should:

1. Work with the Business Systems Modernization Office’s Change Control Board to include within future information systems plans an automated reconciliation of Forms 941 and 8027 data to identify non-compliance in tip reporting. If the programming cannot be accomplished in the near future, the Commissioner, SB/SE Division should consider a "stop gap" comparison to determine the extent of non-compliance, and determine whether any specific enforcement strategy is necessary.

Management’s Response: Management agreed to consider two options: creating a Masterfile account on the filing of Forms 8027; and resubmitting a RIS to develop various on-line databases (Forms 941, Forms 8027, and TRAC/TRDA participants), which would be linked to each other to allow for cross-checking among the databases.

In the interim, given budget restraints, management stated they will work with the Brooklyn DORA Research Office to help them manually run a crosscheck with filed Forms 8027 and Forms 941.

2. Consider developing a multi-user software application, which will provide district Tip Program personnel the capability to add/append records, edit fields, generate reports, and perform comparative analyses of agreements/establishments. This could limit inconsistencies and duplications between districts and help ensure reliable data at the National level with respect to accomplishment of program goals.

Management’s Response: Management agreed to submit a RIS requesting a multi-user software program. The application will allow data associated with the Tip Program to be processed simultaneously with other employment tax nonfiler programs.

In the interim, IRS management will send instructions to field offices stressing the need for accurate information when submitting quarterly reports.

District Offices Do Not Consistently Use the Tip Program to Improve Compliance

As previously stated, employees are required to report their tip amounts to their employers, who are then required to report the amount of the tips to the IRS. The Tip Program was initiated to improve and ensure this compliance by employers and employees in industries where tipping is customary. Enforcement, such as examining tax returns of employees who do not report their tips, is a necessary tool to ensure compliance in tip reporting, whether in a TRAC/TRDA Agreement or not.

Prior to October 1, 2000, districts were precluded from performing employer-only examinations when non-compliance was identified. Instead, the IRS only examined the employees receiving the tips. Districts with limited resources to conduct examinations would have had difficulty enforcing compliance, particularly when these examinations would involve multiple employees.

The use of the Tip Program differed significantly depending upon resources made available and district management’s approach to implementing the program. The following chart shows the inconsistencies in obtaining agreements and conducting examinations in the three districts reviewed.

The following examples of inconsistent practices contributed to the differences shown in the table above.

• District #1 conducted examinations for a variety of reasons stemming from employee non-compliance with the terms of the employer agreement, to the employer not signing an agreement and not increasing compliance. District #2 would have conducted examinations under similar circumstances, but decided to apply resources to other returns with compliance-related issues. District #3 had a policy of not examining employers who were solicited to enter agreements.
• District #1 had the Tip Coordinator and Revenue Agents soliciting Tip agreements. Districts #2 and #3 only had the Tip Coordinator soliciting agreements.
• District #3 did not offer TRDAs, and District #1 had neither solicited nor secured a restaurant agreement in over 2 years. District #2 had been continually soliciting TRAC/TRDA agreements for over 2 years.
• Districts #1 and #3 used the Form 8027 database, as recommended by Tip Program Policy, as the primary source in determining potential non-compliance, but District #2 did not use it as the primary source. In lieu of the Form 8027 database, District #2 used county health department records as its primary source for tip agreement solicitations. Although we did not evaluate the effectiveness of District #2’s approach, it may be a helpful addition to the Form 8027 database, but should not be the primary source.

A contributing factor to these inconsistencies is that National Headquarters oversight is limited to two program analysts, one responsible for the restaurant industry and the other for the hair and beauty industries. Each has the responsibility to administer the program nationally in addition to ensuring districts adhere to program guidelines and procedures.

Periodic and timely monitoring of the Tip Program is critical to help identify and prevent inconsistencies in solicitations, agreements and enforcement. Without a consistent approach to using agreements and conducting examinations when necessary, the success of the program is not being maximized and taxpayers are not treated equally.

3. The Commissioner, SB/SE Division needs to re-emphasize the importance of the Tip Program and ensure that adequate oversight is provided. Such oversight and periodic monitoring could help ensure policies and procedures are being applied uniformly with respect to enforcement actions and solicitations.

Management’s Response: Management agreed to re-emphasize the Tip Program at future executive meetings. In addition, management will implement field assistance visits, providing policy guidance with program objectives.

Effective Transition of the Tip Program to the New Taxpayer Education and Communication Function Is Questionable

As part of the IRS’ reorganization, the TEC function is responsible for outreach activities relating to developing new, and maintaining existing, voluntary agreements for small business taxpayers. However, the TEC function has neither immediate plans nor adequate personnel to ensure a smooth transition of the Tip Program from the SB/SE Division’s Compliance function. Consequently, the Compliance function is continuing to operate and manage the Tip Program in Fiscal Year 2001.

The reason for the delay in transferring the Tip Program is that the TEC function is the last major segment of the SB/SE Division to be brought into full operation. Consequently, personnel were not available to conduct advance strategic planning in this area. A senior district manager was assigned the task of preparing a plan for this transition at the end of calendar year 2000, but substantive progress had not been made as of the completion of our fieldwork.

The TEC function anticipated hiring 215 employees by January 2001, and plans to be fully staffed by October 2002. However, some employees hired will be immediately responsible for assisting taxpayers during the "filing season" (the first three and one-half months of each calendar year), thus limiting their ability to solicit new agreements and monitor existing agreements during this period.

Therefore, the filing season has the potential of both burdening the taxpayers who have agreements and limiting the effectiveness of the program. Taxpayers with agreements will be burdened when TEC function employees are unavailable to assist them with questions concerning their agreements during the filing season. The effectiveness of the program will be reduced because the TEC function employees will not be able to monitor existing agreements during the filing season, even after being fully staffed.

In addition, the TEC function will only provide assistance to the SB/SE Division with respect to the Tip Program. However, OETAC records indicate over 60 percent of the current TRAC/TRDA Agreements fall under the IRS’ Large and Mid-Size Business (LMSB) Division. Further, some taxpayers in the IRS’ Tax Exempt and Government Entities (TE/GE) Division may receive tips in the course of their employment. This is significant because officials in the TEC function do not know who will monitor and solicit future tip agreements that affect the LMSB and TE/GE Divisions.

Current TRAC/TRDA Agreements are industry-specific, (i.e., Food and Beverage, Hair Salons, and Gaming) and the sole responsibility of the SB/SE Division. The TEC function is considering advocating the division of responsibility for agreements among the SB/SE, LMSB, and TE/GE Divisions based on the type of taxpayer. Tip Program personnel have expressed concern that this approach may cause taxpayer burden since the size of restaurants (i.e., their assets) can vary from year to year, placing the taxpayer under a different IRS division. Therefore, restaurants having questions may not know what division to contact from year to year.

Recommendation

4. The Director, TEC, in conjunction with the Director, Compliance, needs to develop a detailed plan that will provide a smooth transition of the Tip Program from the Compliance function to the TEC function. This plan needs to address agreements crossing organizational lines (LMSB, TE/GE), as well the effects filing season activities have on current and future solicitations.

Management’s Response: Management established a joint team consisting of TEC and Compliance function personnel to address the transition of the Tip Program. The team plans to have recommendations completed by June 30, 2001, so that operational and program responsibility will reside with the TEC function by October 1, 2001.

Efforts to Expand the Tip Program Strategy to Other Industries Have Limitations

The IRS has identified the Tip Program as one of its seven National Strategies and would like to further extend the Program to all other industries where tips are customary and should be reported as income on tax returns. These industries include hair and beauty workers, taxi drivers and parking lot valets. Actual time frames are yet to be determined for initiating some of these industry-specific programs. However, based upon current procedures in the restaurant industry, there are several reasons why the IRS may not be able to effectively expand the Tip Program to other industries.

• While there is no national policy concerning a minimum employee threshold, the Tip Program generally overlooks contacting and executing agreements with small establishments (i.e., those with less than 10 employees). However, one of the three districts reviewed is not soliciting agreements with businesses that have less than 50 employees. This local policy is due to the labor and time intensive nature of individual solicitation and employer contract. This practice of excluding very small restaurant businesses seems to contradict the stated expansion plans of the program to other industries, which may include many very small business establishments with few employees.
• Form 8027 is legislatively required to be filed only by restaurants with more than 10 employees, thereby excluding small restaurants and other industries. Use of Form 8027 in other industries will not be possible without legislative change.
• Some of these other industries, such as the hair and beauty industry, do not always have typical employer/employee relationships. Instead, these industries sometimes utilize owner-operators who receive the summary of their annual income on Miscellaneous Income (Form 1099) rather than Wage and Tax Statement (Form W-2), and therefore their "pay" is not reported on Form 941.

These systemic limitations will complicate the ability of the IRS to identify non-compliant businesses in these industries and to successfully expand the Tip Program.

5. While SB/SE Division officials are generally aware of these limitations, the Commissioner, SB/SE Division needs to ensure that obstacles to expand the program are addressed, prior to resource allocation and commitment.

Management’s Response: Area offices were advised to set a tolerance level in identifying which taxpayers would be contacted for participation in the program. Specifically, Form 8027 would be used for the restaurant industry in identifying the worst cases of tip underreporting. For other targeted industries not required to file Form 8027, management instructed field offices to review Forms 941.

Conclusion

While the Tip Program appears to have contributed to the increased reporting of tips, it does not ensure full compliance in tip reporting. SB/SE Division management does not provide sufficient oversight to ensure the effective administration of program policies and guidelines. Additionally, the expansion strategy of the Tip Program into other tipping-related industries may have systemic problems because of reporting information limitations and the small individual size of many of these business establishments.

Detailed Objectives, Scope, and Methodology

The overall objectives of this review were to determine whether the Tip Rate Determination and Education Program (Tip Program) achieved its goal of effectively increasing taxpayer compliance, and whether the program violated taxpayers’ rights. To achieve these objectives we:

1. Determined if the Internal Revenue Service (IRS) monitored the Tip Program’s effectiveness.

1. Determined how National Headquarters was monitoring the Tip Program nationally. Ascertained what data district offices provided and whether the information was validated for accuracy.
2. Interviewed the Tip Coordinators in the Manhattan, Georgia, and Houston districts regarding the application of the Tip Program and determined whether districts were using any local policies.
3. Evaluated the methodology employed to determine the effectiveness of the Tip Program at the district level.
4. Determined how the districts were monitoring participants and non-participants in the program.
5. Determined if management at either the National Headquarters or selected districts maintained management information regarding the correlation between non-participation in the program and examination rates.
6. Requested a list of 25 taxpayers electing not to participate in the FiscalYear (FY) 1999 and FY 2000 Tip Programs and determined if an examination indicator was present and evaluated the rationale for the examination decision.
7. Randomly sampled 25 Tip Rate Determination Agreements (TRDA) and 25 active Tip Reporting Alternative Commitment (TRAC) Agreements in each district reviewed, out of the 1,234 total agreements in the three districts, to determine whether the Small Business/Self-Employed (SB/SE) Division’s Compliance function:

1. Management reviewed and approved all agreements.
2. Staff consistently monitored both TRDA and TRAC Agreements.

1. Determined whether National Headquarters was ensuring that key district summary management information system data was accurate to enable the SB/SE Division to measure the success of the Tip Program.

1. Interviewed district tip coordinators to determine the procedures employed in tracking TRAC/TRDA Agreements. In addition, determined what, if any, reviews were performed to ensure the accuracy of quarterly statistics submitted to National Headquarters.
2. Evaluated the methodology used to accumulate and compile management information regarding agreements at the national and selected district levels, and determined whether effective controls were in place to ensure data reliability:

1. Determined whether districts were consistently applying the same methodology in compiling data submitted to National Headquarters.
2. Compared district Management Information System (MIS) data on a sample basis to current TRAC/TRDA Agreements.
3. Determined what reconciliations were performed with regard to current agreements secured before submitting the data to National Headquarters.

1. Determined whether the IRS was threatening taxpayers that it contacted with examination, and if the taxpayers were unknowingly allowing de facto examinations when entering TRDAs.

1. Determined the policies and practices used in the selected districts to determine the taxpayer’s tip rate.
2. Utilizing the sample of 25 TRDAs selected in Objective I, step 8, determined:

1. What records the taxpayer provided to the Revenue Agent to obtain the TRAC/TRDA Agreement.
2. If comments were made in the history sheet concerning other areas of the return.
3. If the taxpayer’s return was referred to for examination after a TRAC/ TRDA review was conducted.

1. Identified the FY 2000 methodology used to identify potential businesses for inclusion in the program at each selected district and determined whether there were any deviations from this methodology.

1. Determined whether the Tip Program increases taxpayer compliance in tip reporting.

1. Interviewed responsible Office of Employment Tax Administration and Compliance (OETAC) personnel to determine the methodology used in determining the success of the Tip Program.
2. Determined whether FY 1998 to FY 2000 national statistics on total tips reported on Employer’s Quarterly Federal Tax Return (Form 941) identified an increase in compliance related to the Tip Program.

1. Determined whether the IRS’ plan for separating the program between the SB/SE Division’s Taxpayer Education and Communication (TEC) and Compliance functions considered the potential effect on taxpayer burden and program efficiency.

1. Interviewed OETAC personnel to determine the impact of the program reorganization.
2. Interviewed responsible TEC design team personnel to determine the methodology for the TRAC/TRDA separation and what the plans were to ensure a smooth transition.

Major Contributors to This Report

Gordon C. Milbourn III, Associate Inspector General for Audit (Small Business & Corporate Programs)

Parker F. Pearson, Director

Gary L. Swilley, Audit Manager

Joseph F. Cooney, Senior Auditor

Doris A. Cervantes, Auditor

Report Distribution List

Commissioner N: C

Deputy Commissioner N:DC

Director, Compliance, Small Business/Self-Employed Division S:C

Director, Taxpayer Education and Communication, Small

Business/Self-Employed Division S:T

Director, Legislative Affairs CL:LA

Chief Counsel CC

Office of Management Controls N:CFO:F:M

Director, Office of Program Evaluation and Risk Analysis N:ADC:R:O

National Taxpayer Advocate TA

Audit Liaison: Commissioner, Small Business/Self-Employed Division S

Management’s Response to the Draft Report

The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.