Proposed regulations released on 162(f) rules on deductibility and reporting of certain fines and penalties

The Treasury Department recently issued proposed regulations under Internal Revenue Code (IRC) sections 162(f) and 6050X to provide guidance on the deductibility and reporting of certain amounts paid to governments, or at their direction, relating to the violation of a law, or investigation or inquiries into the potential violation of a law. 

Section 162(f) – originally enacted in 1969 – prevents taxpayers from deducting most fines and penalties. The Tax Cut and Jobs Act (TCJA) amended Section 162(f) to provide clarity around the application of the rule. TCJA provided certain exceptions to the general rule and created new code Section 6050X, which imposes reporting requirements on governmental entities that have imposed fines or penalties.  

As amended by TCJA, Section 162(f)(1) provides that no deduction shall be allowed “for any amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government, governmental entity, or nongovernmental entity in relation to the violation of a law or the investigation or inquiry by such government or governmental entity into the potential violation of a law.” The statute provides an exception for amounts if: (1) the amounts are identified (in an order or agreement) as restitution, remediation, or paid or incurred to come into compliance with the law, and (2) the taxpayer establishes that the amount was paid or incurred for one of those purposes.  

The proposed regulations were issued to provide “operational and definitional guidance” in connection with the changes made by the TCJA.     

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