The Internal Revenue Service is acutely aware of the volume of tip income generated in the United States. Therefore they are shifting the compliance aspect of this income onto employers. This is a direct result of our government’s need for more revenues including Social Security and Medicare taxes.
This agreement basically exempts the restaurant from the underpayment of tax due to under reporting of tip income unless the IRS examines all those employees who under reported first. In effect, it shifts the tax obligation to the employees where it belongs in the first place.