The IRS has provided transitional guidance regarding the new reporting requirements for certain fines, penalties, and other amounts under Code Sec. 6050X, which was added by the Tax Cuts and Jobs Act ( P.L. 115-97).
Under Code Sec. 162(f), as amended by P.L. 115-97, fines and penalties are not deductible as business expenses if paid or incurred to, or at the direction of, any federal, state or foreign government or governmental entity due to the violation of a law (or the investigation or inquiry into the potential violation of a law). Code Sec. 162(f)(2) provides a number of exceptions to this prohibition. To be eligible for the general exception, the taxpayer must meet an “establishment requirement.” The taxpayer must establish that the amount paid or incurred:
constitutes restitution (including the remediation of property) for damages due or may be due to the violation (or potential violation) of a law; or
is paid to come into compliance with a violated law, or the investigation or inquiry into the violation or potential violation of a law.
In addition, the taxpayer must also meet an “identification requirement.” Under this requirement, the amount paid or incurred must be identified as restitution or as an amount paid to come into compliance with such law in the court order or settlement agreement.
Code Sec. 6050X establishes a reporting requirement if the amount of the suit or agreement is $600 or more. The government 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 stating:
the total amount to be paid as a result of the suit or agreement;
any amount to be paid for restitution or remediation of property; and
any amount to be paid for purposes of coming into compliance with any law that was violated or involved in the investigation or inquiry.
In addition, the individual required to file the return must also furnish a statement to each person or entity that is a party to the suit or agreement. The statement must provide: the name of the government or entity, and the information included in the return that the individual filed with the IRS.
Under the transitional guidance, Code Sec. 6050X reporting will not be required until the date specified in the proposed regulations, which will not be earlier than January 1, 2019. Reporting will not be required with respect to amounts required to be paid or incurred under a binding court order or agreement entered into before the specified date.
Furthermore, until proposed regulations are issued, the Code Sec. 162(f)(2) identification requirement is treated 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. However, even if the identification requirement is treated as satisfied, taxpayers must also meet the establishment requirement under Code Sec. 162(f)(2) in order to qualify for the exception from Code Sec. 162(f).
Comments on any and all issues related to the application and implementation of Code Secs. 162(f) and 6050X must be received by May 18, 2018. Submissions should be mailed to: CC:PA:LPD:PR ( Notice 2018-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044. Submissions may be also be hand delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to: CC:PA:LPD:PR ( Notice 2018-23), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW. Washington, D.C. Comments may be submitted electronically to Notice.Comments@irscounsel.treas.gov. Include “Notice 2018-23” in the subject line.