Betty Williams | TaxConnections

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In 2012, the Internal Revenue Service issued Revenue Ruling 2012-18 directing that automatic gratuities-tips added by the restaurant to the bill of large parties– be classified as service charges, which are treated as regular wages subject to payroll tax withholding, rather than tips to be reported by the employee. The IRS later delayed implementation of the rule until January 1, 2014 to allow restaurants time to implement strategies for complying with the new rule.

The IRS regards automatic tips as service charges because they are not payments made voluntarily by the customer. However, providing a list of suggested tip amounts would not be considered a service charge because the customer is free to choose whether to tip and how much to tip. Restaurants that continue the practice of adding a gratuity to the bills of large parties will be required to factor those tips into employee pay. This will confuse payroll accounting because hourly rates of employees may change day to day based on the number of large parties served each day. Because of this complicated accounting, it is likely that most restaurants will do away with the automatic gratuity.

Revenue Ruling 2012-18 discussing the rule can be found here http://www.irs.gov/irb/2012-26_IRB/ar07.html and Revenue Ruling 2012-50 extending the time for implementation of the rule can be found here http://www.irs.gov/pub/irs-drop/A-12-50.pdf.

In accordance with Circular 230 Disclosure

Written by Betty Williams | Posted in United States

Although the Internal Revenue Service won’t comment on the reason Bank Leumi customers were kicked out of the IRS’ Offshore Voluntary Disclosure Program (OVDP) after not only being accepted into the program, but after some had already received a final clearance and paid the amounts due to the IRS, it is suspected that the IRS admitted the taxpayers into the program in error. If a taxpayer is already under investigation or audit, he won’t be admitted into OVDP. Once admitted, a taxpayer can be removed if he does not cooperate with the government or makes false statements with regard to the disclosure. Since some of these taxpayers were readmitted, it is likely they were originally admitted in error. Regardless, the right result was reached with this reversal if the IRS wants taxpayers to continue to come forward and disclose offshore accounts.