Internal Revenue Code Section 162, as amended by the 2017 Tax Cuts and Jobs Act (TCJA), provides that no deduction is allowed for any amount paid to, or at the direction of, a governmental entity in relation to the violation of any law. A corresponding obligation to report the receipt or imposition of such “fines or penalties” was imposed on governmental entities for amounts of $600 or more, however, the reporting obligation is postponed until the Internal Revenue Service issues proposed regulations regarding the above provision.
Existing Treasury regulations make clear that the rules regarding non-deductibility (and presumably information reporting) also apply to civil penalties imposed under federal, state or local law with respect to tax returns.
Although the IRS has not issued proposed regulations as required by TCJA, it recently issued a new Form 1098-F and related instructions to implement the reporting scheme beginning in 2019. Similar to other types of Forms 1098 and 1099, reports by governmental entities must be filed with the IRS and a copy provided to the payor.
For more information, please contact Tom Hammerschmidt in the Ann Arbor, Michigan office at 734-623-1602 or any member of Dickinson Wright’s tax department.