Unreported Tips - 50% penalty

[Snaggletooth]

Have a client with Unreported Tips - tailor made for Form 4137. Some $2000 is involved, and she didn't tell her employer because the employer didn't want the hassle of reporting anything other than what came out of his allocation formula. Reporting extra wages will enhance her EIC but the amount is reasonable and "allocated" tips on the W-2 are very low, and this extra amount is still FAR from maximizing her EIC, so I'm going to buy her story.

So the 4137 calculates the uncollected FICA/Medicare and carries the extra tax to the return. However, I'm told there is supposed to be a 50% penalty for failing to report the tips to the employer. Software does not calculate the 50% penalty.

Should it??

[mactoolsix]

Per Pub 531:
You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. I would think the employer not accepting the tip report is reasonable cause. I would attach a statement as to the fact.

As for the employer: (from IRS Bulletin 2012-26)
Section 3111 of the Code requires the employer to pay social security tax on the amount of cash tips received by the employee up to and including the contribution and benefit base as determined under section 3121(a)(1) and to pay Medicare tax on the total amount of cash tips received by the employee. However, if the employee either did not furnish the statement pursuant to section 6053(a) or if the statement furnished was inaccurate or incomplete, in determining the employer’s liability in connection with the taxes imposed by section 3111 with respect to the tips, section 3121(q) provides that the remuneration is deemed, for purposes of subtitle F (Procedure and Administration), to be paid on the date on which notice and demand for the taxes is made to the employer by the Internal Revenue Service (Service).

The employer is going to be on the hook for some FICA!

Mike

[Snaggletooth]

MacTool6

Thanks for the advice. But no one is interested in a slugout with a former employer or with rounds of possible correspondence for the small amount of money involved. interested in paying this 50% penalty and being done with it.

Is there are way to voluntarily file and pay this without the IRS having to turn around and bill taxpayer for it?

Many taxpayers would rather pay a lousy $100 penalty than to get involved with IRS, former employers, etc.