The Internal Revenue Service (IRS), part of the Department of the Treasury, has announced a significant adjustment to the public hearing process for its proposed regulations on occupations that customarily receive tips and the definition of 'qualified tips' for income tax deductions. On October 23, 2025, the agency published a notice in the Federal Register (Volume 90, Number 203, Page 48481) changing the hearing—originally scheduled for the same day at 10 a.m. Eastern Time—from an in-person event to a telephonic-only format. This shift stems from a lapse in federal appropriations, which has disrupted normal operations. The proposed rules, outlined in a notice of proposed rulemaking (NPRM) published on September 22, 2025 (90 FR 45340), aim to clarify eligibility for a tax deduction related to tips, focusing on occupations that regularly received them on or before December 31, 2024. This development highlights ongoing challenges in federal rulemaking amid budgetary constraints, potentially affecting how service industry workers report and deduct tip income.
Background on the Proposed Regulations
The proposed regulations under docket REG-110032-25 and RIN 1545-BR63 seek to establish clear guidelines for what constitutes 'qualified tips' and identify occupations that have historically relied on tipping. According to the NPRM, these rules are designed to support an income tax deduction for qualified tips, a provision likely tied to broader tax policy efforts to alleviate burdens on low-wage workers in tip-dependent sectors. The IRS defines 'qualified tips' in the context of this deduction as gratuities received in the course of employment in specified occupations, provided they meet criteria such as being customary and regular prior to the end-of-2024 cutoff date.
This initiative builds on existing IRS frameworks for tip reporting, such as those under Section 3121(t) of the Internal Revenue Code, which addresses tips in the context of Social Security and Medicare taxes. However, the new proposal introduces a deduction mechanism, which could reduce taxable income for eligible workers. The cutoff date of December 31, 2024, suggests an intent to grandfather in traditional tipping practices while potentially excluding emerging or non-traditional forms of gratuities, such as those from digital platforms. Key players include the IRS's Office of Associate Chief Counsel (Procedure and Administration), with Oluwafunmilayo A. Taylor signing the notice as Section Chief of Publications and Regulations.
Reasons for the Hearing Change and Procedural Implications
The decision to switch to a telephonic-only hearing was prompted by a lapse in appropriations, a reference to the temporary shutdown of non-essential federal functions due to unmet funding deadlines in Congress. This is not uncommon; similar lapses occurred in 2018-2019 and 2013, disrupting agency activities including public comment periods. The notice specifies that if no timely requests to speak are received, the hearing may be canceled altogether. Requests to testify or attend were due by October 22, 2025, with comments submitted via regulations.gov.
Procedurally, this change aligns with the Administrative Procedure Act (APA), which requires agencies to provide opportunities for public input on proposed rules. By opting for telephonic access, the IRS ensures compliance while minimizing costs and logistical hurdles during the funding shortfall. However, it may limit participation for those without reliable phone access or who prefer in-person engagement, potentially affecting the diversity of feedback. The notice emphasizes that individuals who previously requested attendance will receive dial-in details via email, maintaining some continuity.
Key Aspects of the Proposed Rules and Stakeholder Perspectives
At the core of the proposed regulations is the identification of occupations that 'customarily and regularly' received tips before the specified date. Examples might include waitstaff, bartenders, and delivery drivers, based on historical IRS guidance like Revenue Ruling 2012-18, which clarified tip reporting in service industries. The definition of 'qualified tips' is crucial for the deduction, ensuring it applies only to bona fide gratuities and not other forms of compensation.
From a legal standpoint, this builds on precedents such as Fior d'Italia v. United States (2002), a Supreme Court case upholding IRS authority to estimate unreported tips for tax purposes. Politically, the rules reflect efforts to support service workers, amid discussions in Congress about tip taxation. Supporters, including labor groups, argue it provides relief to underpaid employees, while critics from fiscal oversight organizations express concerns over potential revenue losses and enforcement challenges. The IRS has invited comments to refine these definitions, indicating an openness to balanced input.
Short-term implications include delayed finalization of the rules if the hearing yields substantial feedback or if the appropriations lapse extends. Long-term, it could standardize tip deductions, influencing tax compliance in industries employing millions. Different perspectives highlight a divide: service sector advocates view it as equitable, whereas tax policy experts warn of administrative burdens on the IRS.
Potential Challenges and Broader Context
Implementing these rules faces hurdles, including verifying 'customary' tipping practices amid evolving work models like gig economy apps. The telephonic hearing format underscores broader federal challenges, such as budgetary instability affecting regulatory timelines. While the proposal avoids endorsing new legislation, it operates within the framework of existing tax codes, potentially intersecting with future reforms.
In summary, this Federal Register notice marks a pragmatic adaptation in the rulemaking process, ensuring public involvement despite fiscal constraints.