Opening Statement of The Honorable Earl Pomeroy, a Representative in Congress from the State of North Dakota

July 15, 2004

The goal of today’s Oversight Subcommittee hearing is to examine the IRS’s current tax administration policies for encouraging employer and employee compliance in the reporting of and paying of taxes on tip income. 

In 1982, Congress passed legislation to provide the IRS with new measures to identify unreported tip income.  At that time, it was estimated that about 85 percent of tip income went unreported by workers in food and beverage, beauty and barber, gambling, and taxicab businesses. 

Two decades later, IRS reports indicate that there has been a significant improvement in tip reporting compliance.  Tips reported from all industries have risen from $8.5 billion in 1994 to $18 billion in 2003.  This is largely attributed to the private sector working closely with the IRS to improve tax reporting by employers and employees.  It is my hope that this coordination will continue and improve even further.

Currently, there are three voluntary IRS programs through which employers can establish tip reporting and tax payment compliance mechanisms.  These programs – the Tips Reporting Alternative Commitment (TRAC), the Tip Rate Determination Agreement (TRDA), and the Employer-designed Tip Reporting Alternative Commitment (EmTRAC) – have had some success operating on a volunteer basis.  The IRS has entered into approximately 35,000 agreements with restaurant employers, for example, because employers recognize that by being part of one of these agreements, a business can significantly decrease the likelihood of future IRS audits of related records.   

The first panel of witnesses today, representing the restaurant, cosmetology, and gaming industries, will discuss the successes and failures of these programs from their experiences.  I hope that, as a result of this hearing, we will bring to light some of the problems these types of businesses are facing in complying with the law and that additional dialogue between the parties and the IRS may take place to resolve these issues. 

On the second panel, we will have the senior IRS official in charge of tax reporting compliance.  Among other issues, he will discuss how the various tip-reporting programs operate to the benefit of employers, employees, and efficient tax administration.  In addition, for firms that have not chosen to enter into voluntary agreements with the IRS, he will discuss the importance of the recent U.S. Supreme Court decision supporting the IRS’s practice of estimating unreported tip income for purposes of calculating an employer’s liability for Social Security and Medicare taxes.   

I thank and commend Chairman Houghton for holding this hearing.  This is an issue that clearly has significance to small businesses as well as their employees, and I know this is the case in North Dakota where I represent thousands of small business owners and employees.  In discussing this issue, we need to ensure that we strike a fair balance among taxpayer rights, small business needs, and tax enforcement.  I am pleased that the Oversight Subcommittee is examining the matter. 

Thank you Mr. Chairman.