Exception for Taxpayers Attempting to Deduct Amounts Paid in Fines and Penalties
Under the Tax Cuts and Jobs Act (TCJA), taxpayers are prohibited from deducting governmental fines and penalties. Fortunately, there is an exception to this general prohibition, so if you paid a fine or penalty to the government and have questions about whether it is deductible, it is important to contact an experienced Florida tax & IRS attorney who can advise you.
After the passage of the TCJA, taxpayers were specifically barred from deducting amounts that were:
- Paid or incurred by lawsuit or agreement;
- Paid to, or at the direction of, a government entity, which includes tribal governments and government agencies; or
- Paid in relation to a violation or investigation into a violation of civil or criminal law.
This prohibition applies regardless of whether the taxpayer in question actually admits guilt or liability, even if he or she merely pays the amount to avoid the expense of litigation or an investigation.
There is, however, an exception to this general ban, under which the disallowance doesn’t apply, which includes payments made
- As restitution or remediation, which means that it was paid to restore a person, a government, or property that was harmed by the taxpayer’s legal violation; or
- To come into compliance with a federal law, which includes payments for specific corrective actions, as well as the provision of specific property, but does not include amounts paid for audits, inspections, or reviews that were unrelated to the investigation or inquiry.
Even in these cases, a taxpayer will not be permitted to deduct the amounts in question if he or she cannot establish that they were paid as restitution, remediation, or to come into compliance with the law, which can only be achieved by providing documentary evidence demonstrating:
- That the taxpayer was obligated to pay the amount identified as remediation, restitution, or to come into compliance with the tax code;
- The specific amount incurred or paid; and
- The date on which the payment was made.
Even when a taxpayer has provided the documentation necessary to establish that a penalty or fine satisfies the exception requirements, he or she will still only be able to deduct the payment if the court order or settlement agreement in which the fine or penalty was ordered also confirms that the amounts were intended as restitution, remediation, or to help the taxpayer come into compliance with the law. In fact, no deductions are allowable unless this identification requirement is met. Under the new regulations, an order or settlement agreement will satisfy this requirement only if it states:
- The nature, or purpose of each payment; and
- The amount of each payment.
The court order or settlement agreement must also specifically state that the payment constitutes restitution, remediation, or was paid to bring the taxpayer into compliance with the tax code. It is also important to note that the mere reporting of an amount paid by a government is not enough to satisfy this requirement.
Schedule a Free Case Review with an Experienced Tax Attorney
For help determining whether you qualify for the exception to the ban on deducting fines and penalties, please call Florida tax lawyer Ronald Cutler, P.A. at 386-490-9949 today.