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GrataSoft™ Solutions turn tip compliance into strategic advantage - minimizing tip tracking and IRS tip program administration while minimizing audit downside.

John Marshall
EAT, Inc, PO Box 144
5 Crescent Ave, Bld G
Rocky Hill, NJ 08553
tel: 609.786.1004
fax: 609.921.7067

Patent Pending tools and processes, which increase value through enhanced operational compliance and material reductions in administrative burden.

ATIP: How IRS immunity can save you money

By John Marshall



Is it possible to enter into a tip program with the IRS, which grants audit immunity for both the establishment and staff at a zero net cost? Is one foolish to believe that such a benefit could be attainable while saving money? Absolutely not, and here’s why.

ATIP is the newest IRS tip program, introduced July of 2006. Although it is presently deemed a pilot program having been approved for three years, it holds a lot of promise by achieving both IRS objectives while meeting or exceeding the needs and desires of tipped establishments, employees and their owners. This should not discourage one from entering this program. The TRAC program began it’s life as a pilot as well. ATIP is somewhat of a hybrid in that it combines many of the features and methods used in existing tip programs. According to the IRS, the administrative requirements are simpler than any of its predecessors. I’m not convinced, while simpler, it is still burdensome, but you can judge for yourself.

There are two primary qualifications for participation. The establishment must have at least 20% credit (charged) sales, and maintain 75% tipped employee ATIP participation. In this case, ‘tipped’ employee refers to both directly as well as indirectly tipped employees.

Its methodology starts off equally simple. Establishments must declare at least their “target amount” of tips. This is determined by taking 2% off the charged tip rate from the previous year’s 8027 (line 1 divided by line 2). Multiply this “target rate” by the gross sales for the present period to find the “target amount” that is to be attributed to all staff. For non-participating staff, these amounts are ignored in favor of normally declared tips, otherwise attributions are considered just as if they were declared by the employee.

Here’s where the slope gets a little slippery. The IRS declared that an operator may attribute these amounts to staff using any “reasonable” method, unfortunately the example given in program documentation as an example of a “reasonable” method is so far from reasonable and needlessly complex that it leaves this author feeling overly cautious about the ATIP claim of a simple solution. This is because the IRS suggests that tips be attributed to staff using either gross sales method, hourly, or both.

That said, if you operate an establishment that is heavy on the credit receipts and which declares all charged tips, you stand a very good chance of saving money over earlier programs, and perhaps even lowering your present tip declarations as a result.

Your chances of sliding into ATIP at little or no cost increases with your establishment’s level of credit receipts as a percentage of sales. The reason for this is quite clear. The program's “target rate” offers the operator an immediate discount of 2% off all charged sales. When applied to cash tips, this discount is amplified by the ratio of charged receipts to cash receipts. For example, in a restaurant with 80% charge receipts, this 2% discount is amplified by 400%, effectively lowering the acceptable cash tip rate by 10% below its charge rate. My inclination is that many establishments are meeting or exceeding this right now, albeit without the audit immunity. Of course this advantage is reduced as percentage of cash receipts increases, but that is to be expected. Even so, a business with 50% charged receipts, which declares all charged tips might still enjoy an effective cash tip rate 4% below their charged rate.

No, don’t thank me yet. There are still further ways to shift these numbers to the operator’s advantage.

Remember that article on (8027 Demystified)? Depending on you or your company’s ability and desire to extract gratuities and calculate carryout sales, your ratio of cash sales to credit sales can vary substantially. Remember that in the tip game, just like your business’s net revenue, there is the ability to improve one’s fiscal performance by either increasing income or reducing costs. It is the same here in the tip world, and applies equally well to any of the tip programs.

Let’s begin with reducing costs, which is done by legitimately reducing total sales by removing all “non-allocable” receipts. These are clearly defined in the (Instructions for form 8027) as receipts for “carry out sales”, and “receipts with a service charge of 10% or greater,” namely any check with gratuity added. It goes on to say that “non-allocable receipts generally include all sales on which tipping is not customary.” Backing out gratuity and take-out sales can often reduce total sales by 10%, and that translates into a cash receipt reduction of 50% in the instance of the 80% credit card establishment!

Next let’s go after the increasing income side of the equation. In the case of tip compliance, raising income equates to raising tips declared. This is not only the primary goal of the IRS, and ongoing TRAC training, there is an often-overlooked pool of funds just begging to be harvested; undeclared house tip-outs. It is often the case that tip-outs received by support staff go under-reported. Why you ask? Because these are typically in cash and 99.999% of the time are never documented by servers as required. After reading (“A case for capturing tip-outs”), you’ll have a newfound motivation and method for capturing these amounts and ensuring their accurate reporting. Your servers will be ecstatic, as their paychecks will be relieved of the taxes on tips provided to their tip-out colleagues and cash tips will rise. In instances of high credit card receipts and unreported tip outs, recovering these by creating a method for declaring and capturing them can often boost cash tips declared by 50% or more!

By now I am sure that you have your pen handy and are ready to sign up. Unfortunately the ATIP program becomes available just once a year on January 1. Most of the primary and all of the secondary benefits can be enjoyed year round by entering a TRAC program. If you are set on participating in the ATIP program and you find the date is between February and September, I would recommend participating in the IRS TRAC program until the calendar year allows an ATIP transition. TRAC agreements begin any calendar quarter following their execution. There are supplemental reporting and training requirements placed on participants that should be considered carefully. GrataSoft, the primary sponsor of TipCompliance.com, offers automated tip policy solutions, and it’s review of GrataSoft Restaurateur can be found here).

Now that the Tip Credit may be applied toward AMT, there is renewed interest and real value in investing in tip compliance and participating in an IRS tip program.

Mr. Marshall is the owner of Main Street Gourmet Eatery and Bakery, Main Street Fine Catering, and Main Street Euro-American Bistro and Bar. He is president of GrataSoft Solutions, developer and publisher of Grata Restrateur and Grata Persona; patent pending solutions for implementing, tracking and managing tip policy, including IRS TRAC, TRDA and EmTRAC Tip Program compliance automation for businesses and individuals. For more information, please visit GrataSoft.com.