Tax Legal Services · Primary-source case analysis

Fior D’Italia: The IRS Could Estimate Aggregate Unreported Tips for Employer FICA Tax

By Aneeta Mishra and Timothy Chan

Published April 29, 2026

Fior D’Italia confirms the IRS’s assessment authority while leaving taxpayers free to challenge the reasonableness of the estimation method on the facts.

Reported tips were lower than charged tips

The restaurant’s employees reported tips individually, but credit-card records suggested materially higher aggregate tipping. The IRS used an average tip rate to estimate total wages and assess employer FICA tax.

The employer tax is separate from employee assessment

FICA imposes an employer share based on wages, including tips. The statute did not require the IRS to audit and assess every employee before determining the employer’s aggregate liability.

Reasonable estimation is permitted

Tax administration often relies on estimates when records are incomplete. The restaurant could contest assumptions, nontip transactions, cash behavior, and other facts affecting the estimate’s accuracy.

Disposition

The Court reversed the Ninth Circuit and upheld the IRS’s legal authority to make the aggregate assessment. It did not hold that every estimation methodology is reasonable.

Key takeaways

• Preserve point-of-sale and tip-reporting data.
• Separate employer and employee assessment rules.
• Test the sample, rate, and transaction assumptions.
• Challenge factual unreasonableness with concrete records.