"Government agencies are beginning to realize that they've been asleep on the job when it comes to the tax implications of these settlements," The Washington Post quoted U.S. Public Interest Research Group senior analyst Phineas Baxandall as saying.
Corporations cannot deduct penalties paid to the government from their federal taxes, but portions of a settlement that go to compensating victims is often deducted as a business expense unless it is explicit in the agreement that this is forbidden, the Post reported Wednesday.
Since 2003, the Securities and Exchange Commission has had a blanket rule that no portion of a penalty payment can be deducted from federal taxes, but most federal agencies do not have similar policies.
As such, Wells Fargo agreed to pay $175 million to settle by the Justice Department that it targeted African-American and Latino borrowers for high interest loans with exorbitant fees. But part of that settlement is set up as compensation for victims, which can be written off as a business expense.
Consumer groups complain that taxpayers are paying at least part of the penalty for bad corporate behavior. Business groups argue that they cannot separate one business expense from another.
But some federal agencies are stipulating in the agreements that they cannot be used for tax deductions. The Justice Department's $4 billion settlement with British oil company BP that resulted from a Gulf of Mexico oil spill and their $500 million settlement with UBS bank over interest rate manipulation were specifically labeled punitive, so they could not be used as tax deductions.
"We are committed to ensuring that criminal resolutions have clear, unambiguous consequences for corporate wrongdoers. Criminal penalties are a price paid for bad behavior, and it isn't fair to get a break on that debt at the taxpayers' expense," Assistant Attorney General Lanny A. Breuer said in an email.