Employee Tips audit frustrations.

I just had an initial meeting with an IRS auditor on behalf of my hair salon client. The client is under examination for payroll tips. The initial IDR only outlined preliminary questions - name of the POS system, payroll system, brief synopsis of how employees get paid and how tips are handled.

The stylists at the salon are all W-2 employees with a commission compensation. Tips are all received via cash. The salon does not allow even a tip line on a debit/credit card receipt. If a customer wants to tip, they must have cash on hand. Every two weeks, employees submit their form 4070, it's entered into payroll as cash tips to calculate and pay FICA/withholding.

My issue is that the audit keeps insisting the business should be filing a Form 8027 annually. But the instructions for this form clearly state that it is for food and beverage companies. When asked if he could show me where in the instructions my client would fall under this requirement, he basically told me that the instructions are outdated and we need to be filing it anyway.

Am I crazy? Anybody else with personal service clients who receive tips that need to fill out this form? Also since the salon does not accept electronic tips, the only way we have to verify tips are the employees 4070s. The auditor is putting together an additional IDR for sales reports, but I don't really know what to expect here.