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Tips are already subject to federal income taxes.
The Internal Revenue Service is proposing a new service industry tip reporting program and is seeking public feedback.
This is not a new concept. The newly proposed program seeks to replace three existing voluntary tip compliance agreements.
If you work in the service industry and rely on tips, a recent claim on social media may have alarmed you.
Mike Palicz, director of tax policy at the conservative advocacy group Americans for Tax Reform, tweeted Feb. 7: "Those 87,000 new IRS agents that you were promised would only target the rich… They’re coming after waitresses’ tips now: ‘monitoring of employer compliance based on actual annual tip revenue and charge tip data from an employer’s point-of-sale system.’"
A screenshot of his tweet was also posted on Instagram, which was flagged as part of Facebook’s efforts to combat false news and misinformation on its News Feed. (Read more about our partnership with Facebook.)
When PolitiFact reached out to Palicz, he said his tweet links to and quotes from the "IRS proposed rule."
But Palicz’s statement leaves out important details about the notice, and what the voluntary program is all about.
First, tips are already subject to federal income taxes.
Second, the new IRS proposal is just that at the moment — a proposal. It is a plan that is open for public comment and offers a new strategy for service industry employers to voluntarily participate as a means to report tips to the IRS. People can comment on the plan by mail or electronically until May 7.
As the IRS described it, the program aims to use advancements in point-of-sale, time and attendance systems, and electronic payment settlement methods to improve tip reporting compliance.
The IRS is proposing this new effort as a means to replace existing voluntary tip compliance agreements known as the Tip Reporting Alternative Commitment Program, the Tip Rate Determination Agreement Program and the Employer-Designed Tip Reporting Program.
The IRS established these existing agreements in the late 1990s and early 2000s for industries such as restaurants and casinos, in which tipping is customary. According to the IRS, the agreements were designed to enhance tax compliance among tipped employees and their employers through taxpayer education, instead of traditional audit techniques.
Employers that currently operate under these existing agreements would be able to transition to the newly proposed Service Industry Tip Compliance Agreement, which would serve as the sole tip reporting compliance program for all service industries, excluding the gaming industry.
IRS spokesperson Eric Smith said the tweet is a mischaracterization and noted that tip income has always been taxable.
"This is not a proposal for the auditing of servers," read a separate statement the IRS sent to PolitiFact. "Yesterday’s action was a proposal for comment — not a rule — based on over a decade of feedback from restaurants and other businesses seeking the increased flexibility for their overall tax compliance on tips."
A 2018 study by the Treasury Inspector General for Tax Administration found that 30% of employers with tip reporting agreements that filed forms for the 2016 tax year had projected unreported tips totaling close to $1.66 billion.
PolitiFact previously fact-checked claims citing the "87,000 IRS agents" figure, which stems from a 2021 assessment from the Treasury Department on how it would use $80 billion in new funding from the Inflation Reduction Act. The report said the funding could pay for 86,852 new full-time equivalent positions and that the hiring would take place over a 10-year period.
Not all of these hires would work as auditors or in enforcement. The money will also be used to upgrade technology and taxpayer services.
The Treasury Department previously said audits will not increase for small businesses and households below the $400,000 threshold.
Mike Palicz claimed that 87,000 IRS agents will now be "coming after waitresses’ tips," after the IRS announced a new service industry tip reporting program.
Tips are already subject to federal income taxes. But the IRS has proposed a new, voluntary tip program to replace existing programs of this type. It is only a proposal for now, and the IRS is seeking public comment for it.
Similar voluntary tip reporting programs have been in place for decades now.
The statement contains an element of truth but ignores critical facts that would give a different impression. We rate this claim Mostly False.
Internal Revenue Service, Service Industry Tip Compliance Agreement Program, Notice 2023-13, Feb. 6, 2023
Internal Revenue Service, "IRS introduces new service industry tip reporting program," Feb. 6, 2023
Internal Revenue Service, "Tip Recordkeeping & Reporting," updated Aug. 5, 2022
Internal Revenue Bulletin No. 2001-2, Jan. 8, 2001
Internal Revenue Service, Proposed Revised Tip Rate Determination Agreement (TRDA) for Use by Employers in the Food and Beverage Industry, April 24, 2000
Fox News Digital, "Biden's IRS plans to crack down on waiters' tips," Feb. 7, 2023
Email interview, Internal Revenue Service Spokesperson Eric Smith, Feb. 9, 2023
Statement, Internal Revenue Service, emailed Feb. 9, 2023
PolitiFact, "Kevin McCarthy’s mostly false claim about an army of 87,000 IRS agents," Aug. 11, 2022
PolitiFact, "Bob Good makes misleading comments about 'army' of IRS agents," Aug.17, 2022
PolitiFact, "Video misleads about size of IRS, audits and armed agents," Aug. 18, 2022
Mike Palicz, Tweet, Feb. 7, 2023
Instagram post, Feb. 7, 2023
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