Proposed Regulations Address Deductibility of Fines and Penalties
The IRS has released Proposed regulations that address changes made to Code Sec. 162(f) by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The Proposed Regulations provide operational and definitional guidance on the deductibility of fines and penalties paid to governmental entities.
TCJA Changes
Under amended Code Sec. 162(f),
businesses may not deduct fines and penalties that are paid or incurred
after December 21, 2017, due to the violation of a law or the
investigation of a violation of law, if a government or similar entity
is a complainant or investigator. Exceptions are available in certain
cases where the payment was made for restitution, remediation, taxes
due, or to come into compliance with a law.
In order for the exceptions to apply, the taxpayer must identify the payment as restitution or compliance in a court order or settlement agreement. In addition, Code Sec. 6050X requires that the officer or employee that has control over the suit or agreement, or the individual designated by the government or entity, must file a return with the IRS.
Establishing Restitution or Remediation
Under the
proposed regulations, a taxpayer can establish that a payment was made
for restitution or remediation by providing documentary evidence
showing:
- the taxpayer was legally obligated to pay the amount of the order or agreement identified as restitution, remediation, or to come into compliance with a law;
- the amount paid or incurred; and
- the date on which the amount was paid or incurred.
The proposed regulations provide a list of documents that taxpayers can use to satisfy the establishment requirement. The regulations also clarify that reporting of the amount by a government or governmental entity under Code Sec. 6050X alone does not satisfy the establishment requirement.
Identification Requirement
According to Code Sec.
162(f)(2)(A), an order or agreement must identify the amount paid or
incurred as restitution, remediation, or to come into compliance with a
law. The proposed regulations state that an order or agreement should
identify a payment by stating both (1) the nature of, or purpose for,
each payment, and (2) the amount of each payment identified. Reporting
of the amount by a government or governmental entity under Code Sec.
6050X does not satisfy the identification requirement.
Taxes and Interest
Under Code Sec. 162(f)(4),
taxpayers may still deduct any taxes due, including any related interest
on the taxes. However, the proposed regulations clarify that taxpayers
may not deduct interest related to penalties.
Reporting Requirements
The proposed regulations
provide appropriate officials with operational, administrative, and
definitional rules for complying with statutory information reporting
requirements with respect to Code Sec. 162(f). If the aggregate amount a
payor is required to pay equals or exceeds the threshold amount
under Proposed Reg. §1.6050X-1(g)(5), the appropriate official must file
an information return with the IRS with respect to the amounts or
incurred paid and any additional information required.
According to the proposed regulations, they must provide this information by filing Form 1098-F, Fines, Penalties, and Other Amounts, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, on or before the annual due date. However, the proposed regulations do not require an appropriate official to file information returns for each tax year in which a payor makes a payment pursuant to a single order or agreement. Instead, the appropriate official must file only one information return for the aggregate amount identified in the order or agreement.
The proposed regulations also require that the appropriate official furnish a written statement to each payor with respect to which it is required to file an information return. The written statement must include the information that was reported on the information return, and a legend that identifies the statement as important tax information that is being furnished to the IRS. They can satisfy this requirement by providing a copy of Form 1098-F to the payor.
Material Change
According to the TCJA, the
amendments to Code Sec. 162(f) apply to agreements entered into on or
after December 22, 2017. The proposed regulations clarify that if the
parties to an agreement that was binding prior to December 22, 2017,
make a material change to that agreement on or after the date that the
proposed regulations become final, the regulations will apply to the
agreement.
If there is a material change to the agreement, the proposed regulations require the appropriate official to update the IRS by filing a corrected Form 1098-F on or before January 31 of the year following the calendar year. The proposed rules also require the appropriate official to furnish an amended written statement to the payor.
Definitions
The proposed regulations also define
key terms and phrases for purposes of Code Sec. 162(f) and Code Sec.
6050X. These include “government,” “governmental
entity,” “nongovernmental entity treated as a governmental
entity,” “restitution,” “remediation of property,” “amounts paid to come
into compliance with a law,” “appropriate
official,” “payor,” and “threshold amount.”
Effective Date
Proposed Reg. §1.162-21 is
proposed to apply to tax years beginning on or after the date the
proposed regulations are published as final regulations, but those rules
do not apply to amounts paid or incurred under any order or agreement
which became binding under applicable law before such date. Prior to the
effective date, taxpayers may rely on Proposed Reg. §1.162-21, but only
if they apply the rules in their entirety and in a consistent manner.
Proposed Reg. §1.6050X-1 is proposed to apply to orders and agreements that become binding under applicable law on or after January 1, 2022.
Comments
Taxpayers may submit comments via the
Federal eRulemaking Portal at www.regulations.gov by following the
online instructions for submitting comments and indicating IRS and
REG-104591-18. Once submitted to the Federal eRulemaking Portal,
comments cannot be edited or withdrawn. Hard copy submissions must be
addressed to: CC:PA:LPD:PR (REG-104591-18), Room 5203, Internal Revenue
Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
Until further notice, any comments submitted on paper will be considered
only to the extent practicable.
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