In this Form 8-K filing with the Securities and Exchange Commission today, Dallas-based Brinker International Inc. — the operator and franchiser of Chili’s Bar & Grill and a number of other popular casual-dining restaurants — said the Internal Revenue Service has demanded “the employer’s share of FICA taxes on unreported tips during the examination period totaling $31.4 million.” It is not clear from the statement in the filing whether the $31.4 million represents the taxes owed or the amount of unreported tips.
The company also disclosed that the the IRS is alleging that alleged that Brinker has failed to fulfill its obligations under a 1996 tip-reporting alternative-commitment agreement with the IRS and has retroactively revoked the agreement. As a result, the IRS is alleging that some portion of the unreported tips should have been treated as service charges subject to employment taxes. The proposed assessment is based on the assumption that the cash-tip reporting rate should have been about two percentage points less than the charge-tip reporting rate.
In the filing, Brinker asserted that it has complied with all of the terms of the January 1996 agreement and with the law pertaining to the employment-tax treatment of service charges, and that it is “vigorously” contesting the accuracy of the proposed assessment related to unreported tips.
Restaurant owners and their counsel should watch this situation carefully. Brinker is a big fish in the restaurant industry, and a successful IRS assessment on this issue will send shock waves through the industry.