In another attempt to recover this unreported income, the IRS is introducing a three-year pilot, the Attributed Tip Income Program (ATIP), which begins January 1, 2007, for food and beverage (F & B) employers, the largest industry segment of tipped employees. (See box below for details.)

According to the National Association of Tax Professionals, the new program benefits employers in three ways:

• Employers receive audit protection for tip reporting while using and complying with ATIP; a big consideration because of hefty penalties (50 to 100 percent) and even criminal sanctions if they willingly underreport.
  
  
• Simplified use of a tip-reporting formula means in most cases, employers no longer need to receive and process tip records from participating employees. Employers simply handle the tip amounts as wages.
  
  
• Enrollment procedure allows employers to simply elect participation in ATIP by checking a designated box on Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, and having participating employees sign a letter of agreement. Gone are the face-to-face meetings with IRS agents and other burdensome paperwork requirements.

"The IRS has been charged with closing the tax gap. Developing programs that increase compliance is a step in that direction. This program should be looked upon as a less burdensome way for employers to comply with the tip reporting rules," said Cindy Hockenberry, enrolled agent and tax information analyst for NATP.

How the ATIP program works At least 20 percent of gross receipts of the establishment must be charged on credit cards with the tip amounts shown. Receipts must be retained for four years. The employer elects annually to participate by checking the ATIP participation box on Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. An alternate simplified method is available for small employers not filing Form 8027. Charged tip rate is based on information from gross F & B sales on the establishment's Form 8027 from the prior year. Using ATIP, the employer uses a formula taking the aggregate of charged tips for all participants, and deducts two percent (in consideration of lower cash tips). The end-result is reported as income for each participating employee. No meeting with the IRS is necessary for determination. A minimum of at least 75 percent of employees must elect to participate, and employee election is voluntary. Each participant will need to sign a letter of participation. This can include any tip-receiving staff, whether they directly or indirectly receive tips. The employer withholds taxes on the tip amount (now included as wages) for each participating employee. Tips attributed to each employee are recorded on the employee's Form W-2.