The IRS and Treasury have released final regulations under Section 162(f) and Section 6050X, Section 162(f) generally disallows a deduction for certain payments to the government or another entity for violations of law. Section 6050X requires the government or entity to file an information return. The final regulations significantly expand the exception to disallowance for amounts paid or incurred for restitution or remediation or to come into compliance with law.
The final regulations limit the Section 162(f) disallowance and expand the deductibility of amounts paid under a settlement or judgment by deleting the rule that identifying an amount as restitution in an agreement created only a rebuttable presumption and the rule relating to material changes, and by adding the rule allowing a deduction for disgorgement payments. The rules specifying that the disallowance does not apply to routine investigations such as audits or inspections or to litigation in which the government is a private party clarify what had been troublesome issues.
Appropriate officials should document a procedure for filing Form 1098-F as part of judgments or settlements that fall within the scope of Section 162(f). Affected taxpayers should review any Form 1098-F received following a suit or agreement to analyze its consistency with the judgment or settlement.