Final rules determine when fines and penalties are deductible

Editor: Sally P. Schreiber, J.D.

Taxpayers subject to government fines and penalties received guidance on the deductibility of those payments in final regulations posted by the IRS on Jan. 12 (T.D. 9946). The regulations provide guidance on Sec. 162(f), which was amended by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, and on information reporting requirements under Sec. 6050X.

Sec. 162(f), as amended by the TCJA, disallows a deduction for the payment of fines, penalties, and certain other amounts. Under Sec. 162(f)(1), taxpayers may not deduct amounts that, under 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. However, this disallowance may not apply to amounts that taxpayers establish, and court orders or settlment agreements identify, are paid as restitution, remediation, or to come into compliance with a law, so long as the amounts otherwise qualify as deductible under the Code (Sec. 162(f)(2)).

The final regulations define “restitution,” “remediation,” and “paid to come into compliance with a law” for purposes of Sec. 162(f). They also define which nongovernmental entities are treated as governmental entities subject to the Sec. 6050X reporting requirements. They adopt proposed regulations issued in May 2020 (REG-104591-18) with some changes in response to comments.

The final regulations were effective Jan. 19, 2021, the date they were published in the Federal Register.