IRS issues transitional guidance with respect to deductibility of fines and penalties and information reporting

Tax Hot Topics newsletterThe IRS on March 27 issued Notice 2018-23, which delays the required reporting on certain fines and penalties under Sections 162(f) and 6050X until at least Jan. 1, 2019, and announces the intent of the government to publish proposed regulations. The new tax reform law enacted on Dec. 22, 2017, commonly referred to as the Tax Cuts and Jobs Act (TCJA), amended Section 162(f) and added the new Section 6050X to the Internal Revenue Code.

Prior to the enactment of the TCJA, Section 162(f) disallowed deductions for any fine or similar penalty paid to a government for the violation of any law. Section 162(f) was amended to expand the disallowance of deductions for amounts paid to or at the direction of a government entity to include potential violations of law unless the taxpayer satisfies two requirements.

First, the taxpayer must establish that the amount constitutes restitution, remediation or required compliance with any law. Second, the court order or settlement agreement must also identify the amounts related to restitution, remediation, or required compliance. Furthermore, a special rule applies in the case of any amount of restitution for failure to pay any tax imposed under the Code.

Until proposed regulations are issued, Notice 2018-23 treats the identification requirement as satisfied if the settlement agreement or court order specifically states on its face that the amount is restitution, remediation or for coming into compliance with the law. Taxpayers must still meet the establishment requirement in order to avoid the disallowance of the deduction. The identification requirement does not apply to amounts paid or incurred under a binding order or agreement entered into before Dec. 22, 2017.

Section 6050X introduces an information reporting requirement for government (and certain nongovernment) agencies for court orders and agreements subject to Section 162(f) if the amount is at least $600. The reporting must separately identify any amounts that are for restitution, remediation of property or correction of noncompliance. Notice 2018-23 provides that reporting under Section 6050X will be required no earlier than Jan. 1, 2019, and no earlier than the date of publication of the proposed regulations.

David Auclair
National Managing Principal,
Washington National Tax Office
T +1 202 521 1515

Sharon Kay
Washington National Tax Office
T +1 202 861 4140

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