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Tax Administration: Systematic Information Sharing Would Help IRS Determine the Deductibility of Civil Settlement Payments

GAO-05-747 Published: Sep 15, 2005. Publicly Released: Oct 18, 2005.
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Although some civil settlement payments are deductible, their deterrence factor could be lessened if companies can deduct certain settlement payments from their income taxes. GAO was asked to (1) identify federal agencies that negotiated some of the largest dollar civil settlements, (2) determine whether selected federal agencies take tax consequences into account when negotiating settlements and officials' views on whether they should address payment deductibility in settlement agreements, (3) determine whether companies with some of the largest civil settlement payments deducted any of the payments on their federal income taxes, and (4) determine what information the Internal Revenue Service (IRS) collects on civil settlements reached by federal agencies.


Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service The Commissioner of Internal Revenue should direct the appropriate officials to work with federal agencies that reach large civil settlements to develop a cost effective permanent mechanism to notify IRS when such settlements have been completed and to provide IRS with other settlement information that it deems useful in ensuring the proper tax treatment of settlement payments.
Closed – Implemented
IRS held meetings with the four agencies with large civil settlements that we included in our report---Justice (DOJ), Health and Human Services (HHS), Environmental Protection Agency (EPA), and Securities and Exchange Commission (SEC)---to reach agreement on how to systematically provide IRS with information useful in ensuring the proper tax treatment on civil settlements. As of January 2008, arrangements were in place for SEC and EPA settlements. SEC's public Web site has all the information IRS needs. SEC settlements also include a signed taxpayer statement that they will not deduct or seek insurance reimbursements for penalties. IRS has tested this and determined that the penalty amounts were not deducted by taxpayers. EPA has agreed to provide IRS with certain information upon written request. EPA also now requires violators to certify that they will not deduct or depreciate expenses incurred in carrying out their settlements. This was done with coordination with IRS and DOJ. As a practical matter, DOJ handles certain EPA environmental settlements and all HHS settlement cases. DOJ agreed to share certain electronic information with IRS concerning cases with settlement amounts of at least $10 million, IRS's computer specialists are coordinating with DOJ to finalize the substance and format of information to be provided electronically by DOJ. Also, IRS issued additional guidance clarifying the deductibility of settlement payments on July 3, 2008 for environmental settlements and on September 5, 2008 for False Claim settlements.

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