TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
The Indian Tribal Governments Office’s Administration
of the Tip Compliance Program for Its Customer Base Increased Voluntary
Compliance
September 8, 2006
Reference Number: 2006-10-131
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Phone Number |
202-927-7037
Email Address | Bonnie.Heald@tigta.treas.gov
Web Site |
http://www.tigta.gov
September 8, 2006
MEMORANDUM FOR COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector
General for Audit
SUBJECT: Final Audit Report – The Indian Tribal Governments Office’s Administration of the Tip Compliance Program for Its Customer Base Increased Voluntary Compliance (Audit # 200610027)
This report presents the results of our review of the Indian Tribal Governments (ITG) Office’s administration of the Tip Rate Determination and Education Program (Tip Program) for its customer base. The overall objective of this review was to assess the adequacy of the ITG Office’s efforts to improve compliance in the reporting of tip income by employees and employers in the Gaming Industry.
With almost $23 billion in revenue in 2005, the Indian-owned Gaming Industry generated more revenue than all commercial gaming operations in the State of Nevada combined and is the largest gaming segment in the United States. Tribal gaming has created approximately 600,000 jobs nationwide and generated $6.1 billion in employer and employee Social Security taxes, personal and corporate income taxes, and excise taxes in Fiscal Year (FY) 2005. According to ITG Office management, tribal entities reported $315 million in tip income, compared to $863 million reported by Nevada gaming entities, in Tax Year 2003.[1]
Impact on the Taxpayer
Since taking over administration of the Tip Program for its customer base, the ITG Office has taken significant actions to improve compliance in the reporting of tip income by both employees and employers in the tribal Gaming Industry. ITG Office management has increased the number of tip rate agreements from 16 to 115 and the average amount of tip income reported quarterly from approximately $68 million to $124 million. This shows the impact of a tip agreement on additional revenue for the Federal Government and represents taxes that are reported and paid voluntarily instead of through enforcement actions.
Synopsis
The ITG office has increased the number of tip rate agreements from 16 to 115 and the average amount of tip income reported quarterly from approximately $68 million to $124 million.
Historically, tip income has been underreported by employees. In FY 1993, the Internal Revenue Service (IRS) developed the Tip Program to help tipped employees understand and comply with the Internal Revenue Code (I.R.C.) and to make the tip compliance process more efficient through the use of voluntary tip rate agreements. The agreements make it easier for tipped employees to calculate and report their tips and to pay their taxes. The benefit of entering into a tip agreement is that, as long as employees and employers comply with the agreements, the IRS will not perform examinations of employees to determine if tip income was reported correctly or examinations of employers to determine if assessments are warranted.
Prior to the ITG Office becoming operational in FY 2001, the IRS had entered into only 16 agreements
with tribal entities for voluntarily reporting tip income and had asserted some
liabilities on tribal casinos under I.R.C. Section (§) 3121(q).[2] In
FY 2001, the ITG Office identified tip reporting as a major compliance issue
for tribal governments because of the increase in tribal gaming revenue and
because the IRS previously had not had a coordinated effort to interact with
tribal governments to ensure compliance with the I.R.C.
Although the ITG Office has taken significant actions to improve voluntary compliance by tribal employers and employees, some entities have declined tip rate agreements. We could not determine the impact of the ITG Office’s actions to enforce compliance with I.R.C. §§ 3121(q) and 3401(f)[3] for those entities not voluntarily entering into tip agreements or entities not adhering to the terms of signed agreements. Most enforcement actions started by the ITG Office were still ongoing at the end of our fieldwork. Specifically, since the beginning of FY 2005, the ITG Office had initiated tip examinations related to 13 tribal entities but had completed examinations for only 3 tribal entities. In addition, the ITG Office has not revoked[4] any of the tip agreements entered into between the IRS and tribal gaming entities and has not assessed any liabilities under I.R.C. § 3121(q), which was assigned to the ITG Office in June 2006 for tribal customers.
Response
We made no recommendations in this report. However, key IRS management officials reviewed it prior to issuance and agreed with the facts and conclusions presented.
Copies of this report are also being sent to the IRS managers affected by the report findings. Please contact me at (202) 622-6510 if you have questions or Nancy A. Nakamura, Acting Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Abbreviations
|
FY |
Fiscal Year |
|
GITCA |
Gaming Industry Tip Compliance Agreement |
|
I.R.C. |
Internal Revenue Code |
|
IRS |
Internal Revenue Service |
|
ITG |
Indian Tribal Governments |
|
TRDA |
Tip Rate Determination Agreement |
The Indian Tribal Governments (ITG) Office was established
as part of the Internal Revenue Service’s (IRS) Tax Exempt and Government
Entities Division in Fiscal Year (FY) 2001.
The ITG Office coordinates all Federal tax administration issues
involving 564 Federally recognized tribes.
These tribes own or control approximately 2,100 business entities,
including businesses or enterprises responsible for properly reporting and
paying employment taxes. Of these approximately
2,100 entities, 318 are casinos employing workers such as card dealers and
restaurant staff that traditionally receive tip income. Internal Revenue Code (I.R.C.) Sections (§) 3121(q) and 3401(f)[5]
require that employees report money received as tip income to the IRS on their
Indian-owned
casinos generated almost $23 billion in gambling revenue for 2005, almost double
the commercial gambling revenue in
With
almost $23 billion in revenue in 2005,
the Indian-owned Gaming Industry generated more
revenue than all commercial gaming operations in the State of
Historically, tip income has been underreported by
employees. Prior to FY 1993, to
ensure compliance with the I.R.C., the IRS performed resource-intensive
examinations on the individual returns of
tipped employees. The examinations often
resulted in significant tax assessments, which
created financial burdens on the employees and their employers.
In FY 1993, the IRS developed the Tip Rate Determination and Education Program (Tip Program) to
help tipped employees understand and comply
with the I.R.C. and to make the tip compliance process more efficient for the
IRS. The Tip Program is coordinated by
the IRS Small Business/Self-Employed Division.
It is intended to improve tax compliance through the use of advance
voluntary compliance agreements, which, for the Gaming Industry, include Tip
Rate Determination Agreements (TRDA) and Gaming Industry Tip Compliance
Agreements (GITCA).
The agreements make it easier for tipped employees to calculate and report their tips and to pay their taxes. Voluntary tip agreements establish rates for each of the tipped occupational categories in the gaming establishment; they are implemented by employers and approved by the IRS. The benefit of entering into a tip agreement is that, as long as employees and employers comply with the agreements, the IRS will not perform examinations of employees to determine if tip income was reported correctly or examinations of employers to determine if assessments under I.R.C § 3121(q)[7] are warranted. This reduces the likelihood of employees receiving assessments for underreporting tip income.
This review was performed at the ITG Office National
Headquarters in
The Indian Tribal Governments Office Has Increased Voluntary Tip Rate Agreement Participation Significantly and Is Expanding Actions to Enforce Tip Reporting Compliance
The ITG Office has taken significant actions to improve voluntary compliance in the reporting of tip income by both employees and employers in the tribal Gaming Industry. After becoming operational in FY 2001, the ITG Office identified tip reporting as a major compliance issue for tribal governments because of the increase in tribal gaming revenue and because the IRS previously had not had a coordinated effort to interact with tribal governments to ensure compliance with the I.R.C.
Prior to FY 2001, the
IRS had entered into only 16 agreements with tribal entities for voluntarily
reporting tip income and had asserted some liabilities on tribal casinos under
I.R.C. § 3121(q). Since then, ITG Office management has
taken over administration of the IRS Tip Program for the ITG Office customer
base. ITG Office management has focused their efforts to improve tip income compliance by employees
and employers in the tribal Gaming Industry by ensuring their customers understand
their tax responsibilities and by providing the opportunity, through tip
agreements, to comply with the I.R.C.
As of June 2006, the
ITG Office had entered into tip agreements with an additional 99 entities and had
refreshed[9] or was reviewing 31 of the total 115
agreements that either had aged or were about to expire. Figure 1 shows the tip agreements entered
into by fiscal year.
Figure 1:
Total Tip Agreements by Fiscal Year (FYs 2000 – 2006)
|
Voluntary Agreements |
Prior to 2001 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
Total |
|
TRDA/GITCA[10] |
16 |
4 |
15 |
18 |
38 |
20 |
4 |
115 |
Source: Analysis
of information from the ITG Office Database[11] and
information from the ITG Office Tip Compliance Coordinator.
In addition,
analysis of the ITG Database, cumulative through September 30, 2005, showed
employees of tribes either begin reporting tip income or show a significant
increase in the amount of income reported as tips after tribes enter into tip
agreements with the ITG Office. Based on a review of 105[12] of the 115 tribal entities under a tip
agreement, we determined tip income reported increased from an average of
approximately $68 million per quarter before the tip agreements to an average
of approximately $124 million per quarter after the tip agreements. Additional analysis showed 53 (50 percent) of
the 105 entities did not report any tip income on their employment tax returns
until after the tip agreements became effective. After
the tip agreements were signed, average total quarterly tip income reported for
the 53 entities increased from $0.00 to approximately $31 million. The
average quarterly increase amount of tip income for the 53 entities was
approximately $586,000, and the median increase amount was approximately $267,000. This shows the impact of a tip agreement on
additional revenue for the Federal Government and represents taxes that are reported
and paid voluntarily instead of through enforcement actions.
Although the ITG Office
has taken significant actions to improve compliance in the reporting of tip
income by both employees and employers, some entities have declined tip rate
agreements. We could not determine the
impact of the ITG Office’s actions to enforce compliance with I.R.C. §§ 3121(q) and 3401(f) for those
entities not voluntarily entering into tip agreements or entities not adhering
to the terms of signed agreements. Most
enforcement actions started by the ITG Office were still ongoing at the end of
our fieldwork. Specifically, since the
beginning of FY 2005, the ITG Office had
initiated tip examinations related to 13
tribal entities but had completed examinations for only 3 tribal
entities. In addition, the ITG Office has not revoked[13] any of the tip agreements entered into
between the IRS and tribal gaming entities and has not assessed any liabilities
under I.R.C. § 3121(q), which was assigned to the ITG Office in June
2006 for tribal customers.
The ITG Office administered the Tip Program to improve compliance
ITG Office management
administered their Tip Program to be consistent with the IRS National Tip
Program and to take into consideration the needs of the ITG Office customer
base. The Tip Program offers tribal
gaming employers the same voluntary tip agreements offered to commercial gaming
employers and provides tribal gaming employers the opportunity to report tip
income properly by establishing minimum tip rates for tipped employees in
specific occupational categories.[14] ITG Office
management took the following actions to improve the Tip Program[15] and to improve compliance with I.R.C.
§§ 3121(q) and 3401(f) for their
customer base.
The
ITG Office developed educational materials and made presentations to its customers
The ITG Office
developed educational material and made 82 presentations to tribal officials in
FYs 2001 through 2005. These
presentations included information such as the benefits of participating in the
Tip Program and legal responsibilities of employers (tribes) and employees. ITG Office management also communicated
educational material through ITG Office newsletters distributed quarterly to
tribes nationwide, on the ITG Office Internet web site, and when meeting with
tribal officials to discuss other compliance issues.
The
ITG Office developed a process to monitor tip agreements
The ITG Office
created the Tip Coordinator position in FY 2005 with the responsibility for
monitoring tip agreements and for ensuring the tribes and their employees
comply with the terms of the agreements.
Prior to establishment of the Tip Coordinator position, the ITG Office
Tip Program was limited to securing new TRDAs and GITCAs with tribal gaming
entities that did not have agreements with the ITG Office. The ITG Database is also used to monitor tip
agreements and to identify aged agreements that should be assigned to ITG Office
field specialists for refreshing. During
FY 2006, the ITG Office Tip Coordinator identified and forwarded 22 TRDAs and
10 GITCAs to field specialists for refreshing.
The ITG Office has taken actions to increase the number of tip agreements with tribes
Based on interviews with ITG Office management and review of the ITG Database, we determined the ITG Office has taken actions to increase the number of tribal entities participating in tip agreements. We analyzed the ITG Database and identified 318 Class II and/or Class III gaming[16] entities (Class II and Class III gaming entities are the most likely to have tipped employees) and determined that, from October 1, 2001, through February 7, 2006, the ITG Office initiated compliance checks[17] and tip rate solicitations[18] to increase tip rate agreements with tribal entities.
Assignment of compliance checks
Based on our analysis of the 318 entities with Class
II and/or III gaming, from October 1, 2001, through January 12, 2006, the ITG Office classifier
assigned 134 compliance checks to ITG Office field specialists. The purpose of the compliance checks was to
review the tribes’ reporting requirements, including employment tax issues, and
identify remedies to improve compliance, such as tip agreements for tribes that
may not be reporting tip income properly.
During a compliance check, if it is determined that employment tax
compliance should improve if a tip agreement is entered into, the ITG Office
will schedule a tip solicitation visit with the tribe to begin the process of
negotiating the tip agreement. For the
134 compliance checks assigned, 50 tip solicitations were also assigned prior
to, subsequent to, or concurrently with the compliance checks.
Assignment of tip rate solicitations
Based on our analysis of the 318 entities with Class
II and/or III gaming, from May 1, 2002, through February 7, 2006, the ITG Office
classifier assigned 189 tip rate solicitations[19] to the ITG Office field specialists. The 189 tip rate solicitations included the
50 solicitations related to the compliance checks discussed above. However, the need for tip rate solicitations
can be based on information other than that learned in compliance checks, such
as the ITG Office field specialist’s knowledge of the tribe or a request for a
tip solicitation by tribal officials. Based
upon review of the 133 tip solicitations that had been closed by the end of
our fieldwork, we determined 62 (47 percent) had resulted in tip
agreements. The remaining 71 tip rate solicitations
were closed as follows:
· For 3 (2 percent) of 133 solicitations, tip rate agreements were refreshed.
· For 40 (30 percent) of 133 solicitations, the tribes declined proposed tip agreements; 12 of these entities were assigned later for tip examinations.
· For 7 (5 percent) of 133 solicitations, closure actions were inconclusive. For example, a solicitation may have been closed on the ITG Database, but ITG Office management may not have been notified by the tribe regarding whether the tribe would accept the tip agreement.
· For 21 (16 percent) of 133 solicitations, the solicitations were surveyed (closed prior to contacting the customer) either by the classifier, ITG Office management, or the field specialist.
Tribal gaming has experienced nearly double-digit growth in revenue every year since 1988. The National Indian Gaming Association anticipates that tribal gaming growth will slow in the future, but, when compared to the yearly double-digit growth since 1988, future growth will be sustainable and focus on expanding current facilities. ITG Office management took significant actions to help tribal employers and employees improve compliance with tip reporting requirements. The number of tip rate agreements increased from 16 to 115, and the average amount of tip income reported quarterly increased from approximately $68 million to $124 million. However, with 318 tribal entities offering Class II or Class III gaming, the ITG Office still has opportunities for continued improvements by helping tribal employers and employees comply with the I.R.C. §§ 3121(q) and 3401(f) requirements for reporting money received as tip income to the IRS.
Appendix I
Detailed
Objective, Scope, and Methodology
Our overall objective was to assess the adequacy of the ITG
Office’s efforts to improve compliance in the reporting of tip income by employees
and employers in the Gaming Industry. To
accomplish our objective, we:
I.
Determined
if the ITG Office’s Tip Rate Determination and Education Program (Tip Program) was
administered effectively to identify and obtain new tip rate agreements or to
update prior tip rate agreements where needed.
A.
Interviewed
ITG Office management and obtained Tip Program objectives, respective policy
guidance, an overview on how the Program operated, and any plans for future
efforts in the tip compliance area.
B.
Determined
how the Tip Program was communicated to tribal entities via the ITG Office’s
Customer Education and Outreach and other initiatives.
C.
Determined
if ITG Office employees received Tip Program training.
D.
Determined
the extent of ITG Office management’s coordination with other IRS operating divisions
in the implementation and execution of the Tip Program.
E.
Determined
how tip rate agreements received from tribal gaming entities were controlled
and monitored to identify if the tip rates had become outdated.
F.
Determined
if the ITG Office had established a process for identifying and pursuing tip
rate agreements for tribal entities that had not entered into an agreement
and/or for tribal entities that had outdated agreements.
G.
Determined,
from ITG Office management, the number of tribal entities in which significant
tipping was known to occur that did not have tip rate agreements.
H.
Determined
the number of instances in which ITG Office employees held Customer Education
and Outreach presentations and/or workshops about the Tip Program and if the
presentations resulted in securing tip agreements.
II.
Performed
analysis of the ITG Database[20] to determine the impact of ITG Office management’s
actions on improving compliance with tip
reporting requirements.
A.
Determined
the ITG Database information used for analysis was valid by relying on previous
Treasury Inspector General for Tax Administration audit work[21] that used and established the validity of
the data. We determined the IRS Master
File information was valid by relying on the Treasury Inspector General for Tax
Administration Information Systems Programs Electronic Data Processing Audit
Support group’s documentation ensuring the data extracted from the Business
Master File were an exact replica and the character of the data were not
changed.
B.
Analyzed
tip rate agreement information in the ITG Database, cumulative through
September 30, 2005.
C.
Analyzed
the ITG Database and related Master File data and evaluated the effect of tip
rate agreements on tip income (i.e., Federal Insurance Contribution Act[22] tax assessments, penalties, no change).
D. Analyzed the ITG Database and evaluated the effect of compliance checks on tip rate agreements.
Appendix II
Major Contributors to This Report
Daniel R.
Devlin, Assistant Inspector General for Audit (Headquarters
Operations and Exempt Organizations Programs)
Nancy A. Nakamura, Acting Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)
Jeffrey M. Jones, Acting Director
Gerald T. Hawkins, Audit Manager
Allen L. Brooks, Lead Auditor
Julia M. Collins, Senior Auditor
Yolanda D. Brown, Auditor
Donald J. Martineau, Auditor
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Deputy
Commissioner, Tax Exempt and Government Entities Division SE:T
Director,
Indian Tribal Governments, Tax Exempt and Government Entities Division SE:T:GE:ITG
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit
Liaison: Director, Communications and
Liaison, Tax Exempt and Government Entities
Division SE:T:CL
[1] Tip income is higher for Nevada because its operations rely heavily on entertainment and restaurant income. Nevada entities may include tribal entities doing business in Nevada.
[2] I.R.C. § 3121(q) (2005) allows the IRS to assess the employer’s share of taxes with respect to unreported tips under the Federal Insurance Contribution Act, I.R.C. §§ 3101-3128.
[3] I.R.C. § 3401(f) (2005) relates to tips received by employees in the definition of “wages” for purposes of employment taxes.
[4] If it is determined that a tribe is not adhering to the terms required in its tip agreement, revocation of that agreement should be considered. Because participation in the Tip Program is voluntary, revocation should be a last resort.
[5] I.R.C. § 3121(q) (2005) and I.R.C. § 3401(f) (2005).
[6] Tip
income is higher for
[7] I.R.C. § 3121(q) allows the IRS to assess the employer’s share of taxes with respect to unreported tips under the Federal Insurance Contribution Act, I.R.C. §§ 3101-3128.
[8] The Compliance and Program Management Office was formerly referred to as the Outreach, Planning, and Review Office.
[9] Refreshed is a term used to indicate the tip agreement may be outdated and needs a follow-up review to determine if the tip rates outlined in the agreement are appropriate.
[10] Revenue Procedure 2003-35, effective May 1, 2003, introduced the GITCA.
[11] The ITG Office Database was developed over the past several years and contains data from the IRS’ main database (Master File), the Bureau of Indian Affairs, and other sources on Indian Tribal governments and their related entities. The ITG Office Database records contain more than 200 data fields and include information such as tribal entity data, filing requirements, and line-item information from filed returns such as wages paid. The Master File is the IRS database that stores various types of taxpayer account information, including individual, business, and employee plans and exempt organizations data.
[12] Tip information was not reviewed for 4 of 115 entities containing invalid information and 6 of 115 entities that had only recently entered into tip agreements.
[13] If it is determined that a tribe is not adhering to the terms required in its tip agreement, revocation of that agreement should be considered. Because participation in the Tip Program is voluntary, revocation should be a last resort.
[14] For the purposes of the TRDA or GITCA, a tipped employee is defined as an employee who regularly or routinely receives tip income, of at least $20 a month, during the course of the employee’s employment.
[15]
The National Tip Program was set to expire in
2005; however, in September 2004, the Program was extended without an
expiration date. With the indefinite
extension of the National Tip Program, the IRS can now administer existing tip
agreements without the need for employers to re-sign the agreements.
[16] There are three classes of gaming. Class I gaming consists of social games for prizes of nominal value. Class II gaming consists of games such as bingo and lotto. Class III gaming consists of card games, dog and horse racing, and all other types of casino gaming.
[17] During a compliance check, the ITG Office field specialist interviews key personnel in the tribal entity and inquires about other related entities and filing requirements to determine whether all record keeping and information reporting requirements are being met. Unlike an examination or audit, a compliance check does not seek to determine a tax liability for any particular period; it is voluntary, and the tribe may refuse to participate in a compliance check.
[18] During a tip rate solicitation, the ITG Office field specialist meets with tribal officials to discuss tipped employee positions and to propose a tip agreement that defines specific tip income rates and/or methodologies for reporting tip income for tribal employees.
[19] There were a total of 189 tip rate solicitations assigned for 160 entities; some of the 160 entities had multiple tip rate solicitations assigned.
[20] The ITG Office Database was developed over the past several years and contains data from the IRS’ main database (Master File), the Bureau of Indian Affairs, and other sources on Indian Tribal governments and their related enterprises. The ITG Office Database records contain more than 200 data fields and include information such as tribal entity data, filing requirements, and line-item information from filed returns such as wages paid. The Master File is the IRS database that stores various types of taxpayer account information, including individual, business, and employee plans and exempt organizations data.
[21] The Process for Assigning Cases Should Be Strengthened to Provide Better Coverage to Indian Tribal Governments Most in Need of Compliance Checks (Reference Number 2004-10-191, dated September 2004) and The Indian Tribal Governments Office Can Improve the Effectiveness, Consistency, and Efficiency of Compliance Checks (Reference Number 2005-10-158, dated September 2005).
[22] The Federal Insurance Contribution Act, I.R.C. §§ 3101-3128.