In May, the Internal Revenue Service (IRS) provided guidance on the deductibility and reporting of certain amounts paid to, or at the direction of, governments. The proposed regulations revise current § 1.162-21 of the applicable regulations and provide operational and definitional guidance concerning the application of § 162(f), as amended by the Tax Cuts and Jobs Act (TCJA). This IRS release guides taxpayers and governments concerning fines, penalties, and certain other amounts.
The TCJA disallows a deduction for the payment of fines, penalties, and certain other amounts. As a result, taxpayers may not deduct amounts that, pursuant to court orders or settlement agreements, are paid to, or at the direction of, governments in relation to the violation of any law or the investigation or inquiry into the potential violation of any law.
Under the TCJA, this disallowance may not apply to amounts that taxpayers establish, and court orders or settlement agreements identify, are paid as restitution, remediation, or to come into compliance with a law provided that the amounts otherwise qualify as deductible under the Internal Revenue Code.
These proposed regulations describe the procedures for taxpayers to meet these requirements. The regulations also define important terms such as restitution, remediation, and paid to come into compliance with a law.
The TCJA also requires governments to report these amounts to the Internal Revenue Service and taxpayers. The proposed regulations provide guidance to governments related to these reporting requirements.
Proposed § 1.162-21(a) provides generally that a taxpayer may not take a deduction under any provision of chapter 1 (see § 161, and the related regulations, concerning items allowed as deductions) for amounts (1) paid or incurred by suit, agreement, or otherwise; (2) to, or at the direction of, a government or governmental entity; (3) in relation to the violation, or investigation or inquiry into the potential violation, of any civil or criminal law. This general rule applies regardless of whether the taxpayer admits guilt or liability or pays the amount imposed for any other reason, including to avoid the expense or uncertain outcome of an investigation or litigation.
Proposed § 1.162-21(b) describes an exception to the general rule, which allows a deduction for certain amounts identified in the order or agreement as restitution, remediation, or paid or incurred to come into compliance with a law and the taxpayer establishes that the amount was paid or incurred for the purpose identified.
In general, § 6050X imposes a reporting requirement on governments and governmental entities with respect to the payment amount identified pursuant to certain suits, agreements, or otherwise. Proposed § 1.6050X-1 provides rules for complying with the reporting requirement.
Under §§ 162(f) and 6050X and proposed §§ 1.162-21 and 1.6050X-1, suit, agreement, or otherwise includes, but is not limited to, settlement agreements; non-prosecution agreements; deferred prosecution agreements; judicial proceedings; administrative adjudications; decisions issued by officials, committees, commissions, or boards of a government or governmental entity; and any legal actions or hearings in which a liability for the taxpayer is determined or pursuant to which the taxpayer assumes liability.