Proposed Regulations for Deduction of Fines and Penalties

| 5/28/2020
Proposed Regulations for Deduction of Fines and Penalties

On May 13, the IRS and the U.S. Department of the Treasury published proposed regulations to implement amendments made by the Tax Cuts and Jobs Act of 2017 (TCJA) to IRC Section 162(f), which, except in certain limited circumstances, disallows a deduction for the payment of government fines and penalties. In addition, the proposed regulations implement Section 6050X, also enacted by the TCJA, which requires information reporting relating to amounts subject to Section 162(f). These provisions generally apply to amounts paid or incurred on or after Dec. 22, 2017.


Under Section 162(f)(1), no deduction is allowed for any amount paid or incurred (whether by suit, agreement, or otherwise) to a government, governmental entity, or nongovernmental entity for violating a law or for a governmental or nongovernmental entity’s investigation or inquiry into a potential law violation. Nongovernmental entities generally are those that exercise self-regulatory powers, including sanctions, in connection with certain qualified boards or exchanges or as part of performing essential government functions.

Sections 162(f)(2) and (3) provide an exception to the general rule, allowing a deduction for amounts otherwise deductible if both of the following are satisfied:

  • The taxpayer establishes that the amount paid or incurred constitutes restitution or remediation of property or is paid to come into compliance with any law (the establishment requirement).
  • The amount paid or incurred is identified as restitution, as remediation, or as an amount paid to come into compliance with a law in the order or agreement (the identification requirement). Meeting the identification requirement is not sufficient to meet the establishment requirement.

Section 6050X requires an appropriate official of a government or nongovernment entity involved in a suit or agreement to which Section 162(f) applies to report to the IRS and to the payer the aggregate amount of $600 or more for all orders or agreements with respect to the violation, investigation, or inquiry. The statute provides the IRS with authority to raise the $600 reporting threshold. Information required to be reported includes the amount required to be paid because of the order or agreement, any amount that constitutes restitution or remediation of property, and any amount paid to come into compliance with the law.

Notice 2018-23 generally delayed reporting until the later of Jan. 1, 2019, or the date proposed regulations are published. The notice also provided that until proposed regulations are published, the identification requirement is satisfied if the agreement or order specifically states on its face that the amount is restitution, remediation, or for coming into compliance with the law. The notice makes clear that the limited exception to disallow the deduction for fines and penalties applies to binding orders and agreements entered into after Dec. 22, 2017, even though government reporting is postponed.

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Proposed regulations

Following are highlights of the proposed regulations:

  • The phrase “suit, agreement, or otherwise” includes nonprosecution and deferred prosecution agreements; administrative adjudications and decisions issued by officials, committees, commissions, and boards of a government or governmental entity; and any actions or hearings in which a taxpayer liability is determined or pursuant to which the taxpayer assumes liability.
  • The definition of nongovernmental entity is the same as in the statute, and for purposes of Sections 162(f) and 6050X only, a nongovernmental entity is treated as a governmental entity.
  • An amount is paid for restitution or remediation if it restores, in whole or in part, the person, government, governmental entity, or property harmed by the violation or potential violation of law. The restitution or remediation amount does not include amounts paid or incurred in lieu of a fine or penalty, as a forfeiture or disgorgement, as a reimbursement to the government for the costs of litigation, or paid to a party not harmed by the violation or potential violation of law.
  • An amount paid to come into compliance with the law includes a payment for a specific corrective action or to provide specific property.
  • The identification requirement is met if an order or agreement states the nature of, or purpose for, each payment each taxpayer is obligated to pay; states the amount of each payment identified; and specifically states that the payment and amount constitute restitution, remediation, or an amount paid to come into compliance with the law (even if in different forms of the requisite words).

The Section 162(f) proposed regulations apply to taxable years beginning on or after the date final regulations are published, except that they will not apply to amounts paid or incurred under any order or agreement that became binding under law before that date. Until then, taxpayers can rely on the proposed Section 162(f) regulations, provided the regulations are applied in their entirety.

The proposed regulations under Section 6050X raise the reporting threshold from $600 to $50,000 and provide that reporting applies to orders and agreements that become binding under applicable law after Jan. 1, 2022.


Section 162(f) provides a limited deduction for fines and penalties paid to government entities only if the taxpayer meets the stringent establishment requirement and identification requirement. Because the requirements are based on facts and circumstances, including the language of orders, settlements, and agreements, it is important for taxpayers to consider the tax consequences as they negotiate resolution with governmental entities. Taxpayers that wait until filing their return to consider whether any portion of a fine or penalty paid is deductible could discover that what they thought was deductible is not.

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Rochelle Hodes
Rochelle Hodes
Principal, Washington National Tax