Notice 2001-1, Employer-designed Tip Reporting Program for the Food and Beverage Industry (EmTRAC)

Part III. Administrative, Procedural, and Miscellaneous
Employer-Designed Tip
Reporting Program for the Food
and Beverage Industry
Notice 2001–1
I. BACKGROUND
In 1993, the Internal Revenue Service
introduced its Tip Rate Determination/Education Program (TRD/EP), which is designed to enhance tax compliance among
tipped employees through taxpayer education and voluntary advance agreements
instead of traditional audit techniques.
The TRD/EP was developed as a means
of enhancing tax compliance while reducing taxpayer burden. In essence, the
TRD/EP envisions that the Service and
taxpayers in industries in which tipping is
common will work together to improve
tax compliance.
The TRD/EP currently offers employers the opportunity of entering into one of
two types of agreements. The Tip Rate
Determination Agreement (TRDA) requires the determination of tip rates; the
Tip Reporting Alternative Commitment
(TRAC) agreement emphasizes education
and tip reporting procedures. The agreements also set forth an understanding that
both the employer and employees who
comply with the terms of the agreement
will not be subject to challenge by the
Service. The decision to enter into either
a TRDA or a TRAC agreement is entirely
voluntary on the part of the employer.
TRDAs are currently in use in the food
and beverage industry and the gaming industry. TRAC agreements are currently
in use in the food and beverage industry
and the cosmetology and barber industry.
The Service expects to begin making
these agreements available to other industries during 2000.
Taxpayers in the food and beverage industry have expressed interest in designing their own TRAC programs. Notice
2000–21, 2000–19 I.R.B. 967, set forth
proposed requirements and procedures for
obtaining approval of an employer-designed EmTRAC program. Notice
2000–21 also offered interested persons
the opportunity to comment on the proposed program. The Service received no
comments. Even so, several nonsubstan-

2001–2 I.R.B.

tive clarifying changes have been made.
They appear in this document.
II. EmTRAC PROGRAM
The EmTRAC program is available
only to employers in the food and beverage industry that have employees who receive both cash and charged tips. The
employer may have one place of business
or many places of business. For purposes
of the program, each place of business is
called an establishment. If an employer
has more than one establishment, it can
choose which establishments to include in
its EmTRAC program.
The EmTRAC program retains many of
the provisions in the TRAC agreement.
The employer must establish an educational program that trains employees that
the law requires them to report all their
cash and charged tips to their employer.
Education must be furnished for newly
hired employees and quarterly for existing employees.
The employer must establish tip reporting procedures, under which a written or
electronic statement is prepared and
processed on a regular basis (no less frequently than monthly), reflecting all tips
for services attributable to each employee.
The EmTRAC program provides an
employer with considerable latitude in designing its educational program and tip
reporting procedures, which the employer
may combine. For example, a point-ofsale tip reporting system could meet both
of these requirements, because the employee is prompted of the tip reporting requirement at the end of each sale and because the reporting occurs at the end of
each sale.
The employer must agree–
1. to comply with the requirements
for filing all required federal tax returns
and paying and depositing all federal
taxes;
2. to maintain the following records
for at least 4 years after the April 15 following the calendar year to which the
records relate:
a. gross receipts subject to tipping, and
b. charge receipts showing
charged tips; and
3. upon the request of the Service, to

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make the following quarterly totals available, by establishment, for statistical samplings of its establishments:
a. Gross receipts subject to tipping,
b. Charge receipts showing
charged tips,
c. Total charged tips, and
d. Total tips reported.
The Service agrees–
1. not to initiate any tip examinations of the employer or an establishment
included in the EmTRAC for any period
for which the EmTRAC program is in effect; except in relation to a tip examination of one or more employees or former
employees of the employer or an establishment.
2. to base any section 3121(q) notice
and demand issued to the employer or an
establishment included in the EmTRAC
and relating to any period during which
the EmTRAC program is in effect solely
on amounts reflected on–
a. Form 4137, Social Security and
Medicare Tax on Unreported Tip Income,
filed by an Employee with his or her
Form 1040, or
b. Form 885-T, Adjustment of Social Security Tax on Tip Income Not Reported to Employer, prepared at the conclusion of an employee tip examination;
and
3. not to evaluate the employer for
compliance with the provisions of its EmTRAC program for the first two calendar
quarters for which the EmTRAC program
is effective.
Both parties agree that, for purposes of
the EmTRAC program, a compliance review is not treated as an examination or
an inspection of books of account or
records, and an inspection of books of account or records pursuant to a tip examination is not an inspection of books or
records for purposes of section 7605(b) of
the Code, and is not a prior audit for purposes of section 530 of the Revenue Act
of 1978.
The effective date of an EmTRAC program is the first day of the quarter beginning on or after the date the Service signs
an approval letter.
An employer may at any time terminate
its EmTRAC program either completely

January 8, 2001

or with respect to one or more establishments. The Service may terminate its approval with respect to the EmTRAC program or a specific establishment or
establishments, only if–
1. the Service determines that the
employer or establishment(s) has failed to
comply with the required provisions; or
2. the Service pursues an administrative or judicial action relating to the
employer, an establishment included in
the EmTRAC, or any other related party
to the employer’s EmTRAC program.
Generally, any termination is effective the
first day of the first calendar quarter after
the terminating party notifies the other
party in writing.
If the employer has an existing TRAC
agreement or TRDA covering one or
more establishments included in the employer’s EmTRAC program, the existing
TRAC agreement or TRDA will terminate
with respect to that establishment or those
establishments upon the approval of the
employer’s EmTRAC program.
III. PROCEDURES FOR
REQUESTING APPROVAL
The employer must request approval of
its EmTRAC program. For this purpose,
the Service has developed a pro forma letter that an employer must use to request
approval of its EmTRAC program. The
letter requests approval of the employer’s
EmTRAC program and states that the employer will comply with the provisions set
forth in the letter (and also set forth in
section II above).
A copy of the approval request letter is
attached to this notice. It can be obtained
by mail by contacting the tip coordinator
in any local IRS office or by calling (202)
622-5532 (not a toll-free call).
The completed approval request letter
and a copy of the employer’s EmTRAC
program should be sent to:
Internal Revenue Service
S:C:CP:ET Room 2404
Attn: EmTRAC Coordinator
1111 Constitution Avenue, N.W.
Washington, DC 20224

January 8, 2001

IV. PROCEDURES FOR APPROVING
REQUESTS
After it receives the approval request
letter, the Service will review the employer’s program. If the program meets
the necessary requirements, the Service
will send the employer an approval letter,
a copy of which is attached to this notice.
The approval letter will specify the effective date of the employer’s EmTRAC program.
If the IRS determines that the employer’s EmTRAC program fails to meet
all the requirements, the IRS will contact
the employer and offer assistance in
working out a program that will meet both
the employer’s needs and the IRS’s requirements.
V. MISCELLANEOUS
Upon request to the local tip coordinator or the EmTRAC Coordinator, the Service will assist any employer in establishing, maintaining, or improving its
educational program or tip reporting procedures.
The Commissioner of Internal Revenue
may terminate all EmTRAC programs at
any time following a significant statutory
change in the FICA taxation of tips. After
December 31, 2005, the Commissioner
may terminate prospectively the Tip Rate
Determination/Education Program and all
EmTRAC programs.
VI. PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-1716.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number. The collections of information in this document are in sections II
and III. This information is required to
comply with sections 6053(a) and 6001 of

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the Internal Revenue Code and to assist
the Internal Revenue Service in its compliance efforts. This information will be
used to monitor the Employer’s performance under its EmTRAC program. The
collections of information are required to
obtain the benefits available under the
EmTRAC program. The likely respondents are business or other for-profit institutions.
The estimated total annual reporting
and/or recordkeeping burden is 870 hours.
The estimated annual burden per respondent/recordkeeper varies from 8
hours to 44 hours, depending on individual circumstances, with an estimated average of 13 hours. The estimated number
of respondents and/or recordkeepers is
20.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103 of the Code.
VII. AFFECT ON OTHER
DOCUMENTS
Notice 2000–21 is superseded.
DRAFTING INFORMATION
The principal author of this notice is
Karin Loverud of the Office of the Division Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this announcement, contact Ida Volz of the Office of Compliance Policy at (202) 6225532 (not a toll-free call).

2001–2 I.R.B.

Letter — Request for EmTRAC approval
Tip Coordinator
Internal Revenue Service
Re: Request for EmTRAC Approval
Dear Internal Revenue Service:
Pursuant to the Employer Tip Reporting Alternative Commitment Program (EmTRAC), I request your approval of the enclosed program for
(name of business), EIN
.
In accordance with Notice 2001–1, 2001–2 I.R.B. 261, if you approve this program_______________________________________
(name of business) agrees to:
(1) comply with the requirements for filing all required federal tax returns and paying and depositing all federal taxes;
(2) maintain the following records for at least 4 years after the April 15 following the calendar year to which the records relate:
a. gross receipts subject to tipping, and
b. charge receipts showing charged tips;
(3) upon your request, make the following quarterly totals available, by establishment, for statistical samplings:
a.
b.
c.
d.

gross receipts subject to tipping,
charge receipts showing charged tips,
total charged tips, and
total tips reported;

(4) operate its EmTRAC program as indicated in the program documents attached to this letter; and
(5) comply with the terms of your approval described in Notice 2001–1.
(name of business)
Also in accordance with Notice 2001–1,
agrees that a compliance review will not be treated as an examination or an inspection of its books of account or records and that
your inspection of books of account or records pursuant to a tip examination will not be treated as an inspection of books or records
for purposes of section 7605(b) of the Internal Revenue Code, and will not be treated as a prior audit for purposes of section 530 of
the Revenue Act of 1978.
All correspondence pertaining to this EmTRAC program (including a notice of termination) should be sent to the address indicated below,
unless we notify you in writing of a change of address.
(name
of business) will send correspondence to you in the manner indicated in your approval letter. All correspondence is effective on the date
of the postmark stamped on the envelope or, in the case of a notice sent by certified mail, on the sender’s receipt.
(name

I represent that I have the authority to agree to these terms on behalf of
of business).
If you have any questions, please contact
or
(e-mail address).

at

(telephone number)

Name of Business
\s\
By:
Title:
Date:
Enclosures:
EmTRAC program documents
List of establishments (name, address, and EIN) participating in the program

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263

January 8, 2001

Letter – EmTRAC approval
Internal Revenue Service
Service Representative

Department of the Treasury
Person to Contact:
Identification Number:
Contact Telephone Number:
Re: EmTRAC Approval

Dear

(Taxpayer):

Thank you for your letter of
requesting our approval of your EmTRAC program and containing your agreements with respect to that program. We are pleased to inform you that your EmTRAC Program meets the requirements of Notice 2001–1.
Accordingly, we agree as follows:
Your EmTRAC program will be effective on
[insert the first day of the quarter beginning on or after
the date the Service signs the letter]. The Service agrees not to initiate any new tip examinations of you or any of the establishments
included in your letter for any period during which your EmTRAC program is in effect, except in relation to a tip examination of
one or more employees or former employees of you or an establishment.
Any section 3121(q) notice and demand that we issue to you (or an establishment) relating to any period during which your
EmTRAC program is in effect will be based solely on amounts reflected on Form 4137, Social Security and Medicare Tax on
Unreported Tip Income, filed by an employee with his or her Form 1040, or Form 885-T, Adjustment of Social Security Tax on Tip
Income Not Reported to Employer, prepared at the conclusion of an employee tip examination.
[insert the first day of
The Service will not evaluate your EmTRAC program for compliance until
the second calendar quarter following the date on which the EmTRAC program becomes effective]. The Service may, however,
review your progress in implementing your EmTRAC program before then.
Your EmTRAC program will remain in effect until you terminate it or the Service terminates its approval. If you no longer wish
your EmTRAC program to apply to one or more of your establishments, you may terminate the program with respect to any establishment(s) by identifying the establishment(s) in writing to the Service Representative described below. If you want to completely
terminate your EmTRAC program, please say that in your letter to the Service Representative.
The Service may terminate its approval only (1) if you fail to comply with your agreements described in your letter, (2) if the Service
pursues an administrative or judicial action relating to you, an establishment, or any other related party to your EmTRAC program,
(3) following a significant statutory change in the FICA taxation of tips, or (4) after December 31, 2005. If one or more establishments fail to comply with any of your agreements, the Service may choose to terminate its approval with respect to that establishment(s).
Any termination will be effective the first day of the first calendar quarter after the terminating party notifies the other party in writing, unless you (or an establishment) fail to comply with your agreements. In that case, the Service may terminate your EmTRAC
program effective as of the first day of the quarter in which you ceased to comply.
Please send all correspondence relating to your EmTRAC program to
and address), unless we notify you in writing otherwise.
If you have any questions regarding this agreement, please contact
(telephone number) or
(e-mail address).

(name
(ID

) at

Thank you for your participation in the program.
INTERNAL REVENUE SERVICE

By:
ID:
Date:

January 8, 2001

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2001–2 I.R.B.