The Service has released proposed regulations (REG-104591-18) on the limitations on deducting fines, penalties, and other amounts paid to governmental entities (and other identified entities) under IRC Section 162(f) and the related reporting requirements under IRC Section 6050X. These newly proposed rules revise Treas. Reg. Section 1.162-21 and add Treas. Reg. Section 1.6050X, in light of the changes made by tax reform to the rules governing the deductibility of fines and penalties (which expanded the types of payments that are denied a deduction under IRC Section 162(f), carved out certain exceptions, and established certain reporting requirements on the part of government and nongovernmental entities).

The proposed regulations clarify the scope of the IRC Section 162(f) expansion, help define certain statutory language (e.g., what constitutes restitution or a payment to come into compliance with law), and provide guidelines for the new reporting requirements under IRC Section 6050X. The proposed IRC Section 162 regulations will apply to tax years beginning on or after the date that the final regulations are published. Taxpayers may, however, rely on the proposed IRC Section 162 regulations in the interim for any order or agreement if they apply the rules consistently and in their entirety. The proposed regulations under IRC Section 6050X will apply only to orders and agreements that become binding under applicable law on or after January 1, 2022.

Among others, the proposed regulations would likely affect the following:

• Taxpayers with legal disputes, settlements, or judgments with any federal, state, local, or foreign government for violation (or potential violation) of a law
• Taxpayers currently negotiating a settlement agreement with a governmental agency
  or
• Taxpayers making payments under statutes such as the False Claims Act or the Foreign Corrupt Practices Act

A Tax Alert with a detailed analysis of the new proposed regulations is forthcoming.