New Form 4137 Gotcha Program

The IRS announced that it is beginning a new program using data from employees’ Forms 4137, Social Security and Medicare Tax on Unreported Tip Income, to determine the employer’s share of Social Security and Medicare taxes on unreported tips.  While employers in industries where tipping is common generally know that they must pay the employer’s share of Social Security and Medicare taxes on tips, most don’t realize that they also may be liable for these taxes on tips in excess of $20 per month that their employees don’t report to them—probably because the IRS has never before made an effort to collect the employer’s share of these taxes.

This compliance initiative is the first time that the IRS has targeted the employers for their share of the employment taxes on their employees’ unreported tip income.

Employers will receive a Form 4520P “pre-notice” prior to receiving a notice (Form 4520) that requires them to pay the unreported FICA tax.  The pre-notice will be issued well in advance of the Form 4520 notice to give employers time to review their records and contact IRS if they find any discrepancies with IRS records.

The notice will include a deadline for responding, but employers can request an extension of the deadline.  IRS will have a dedicated phone line to help resolve any discrepancies that are noted by employers on the pre-notice.  Notices will be sent to employers in all industries that commonly have tip income, rather than only the food and beverage industry.  The notices will include a mailing stuffer with frequently asked questions from the IRS pilot program.

The IRS is not expected to assess penalties or interest on the amount due if the employers cooperate and include the taxes owed on their next Form 941, Employers QUARTERLY Federal Tax Return.

If you need assistance responding to an IRS notice or would like more information on the new IRS initiative, please give this office a call.

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