Deducting false claims act settlement payments: The latest from the IRS

Pharma and Life Sciences Tax News: Vol 7, No. 14

The deductibility of False Claims Act (FCA) settlement payments made to the Department of Justice (DOJ) long has been a high-priority issue for the IRS.

That was made clear in March 2007, when the IRS included "government settlements" on its initial list of Tier I issues -- issues that are of "high strategic importance" to the IRS Large and Mid-Size Business Division (LMSB) and "have significant impact on one or more industries."

Since then, the IRS has issued a series of documents providing guidance for IRS examiners regarding this issue that focus on FCA settlement payments. The most important of these documents are LMSB Directive 1 and its attached FCA settlement audit guidelines (May 30, 2007) and an LMSB Coordinated Issue Paper (CIP) (September 5, 2008).

This guidance has made it extremely difficult for taxpayers to sustain deductions for portions of FCA settlements other than single damages, plus certain non-damage amounts such as investigatory costs and whistleblower rewards (see below). The guidance also applies to settlements with any other governmental entity (state, local, and tribal) under authorities other than the FCA.

Despite this guidance, the IRS in particular instances has been willing to settle this issue on terms that are somewhat taxpayer-favorable. (Click here to continue)