Taking the Sting Out of the Slap on the Wrist: Why the Tax Cuts and Jobs Act Deductibility Carve-outs Under I.R.C. Section 162(f) are Hurting the Average American Taxpayer

The Section 162(f) carve-outs created under the Tax Cuts and Jobs Act of 2017 should concern all taxpayers. Where there were no exceptions previously, now both civil and criminal wrongdoers have the potential to deduct the payments they make in restitution for their actions from their taxable income as a business loss. These carve-outs represent government spending for the benefit of individuals and corporations behaving badly and at the expense of the average American taxpayer. The government is leaving tax revenue on the table by allowing deductibility for fines and penalties, which negatively impacts the federal “power of the purse.” For that, all American taxpayers should be concerned. The carve-outs under I.R.C. Section 162(f) should be eliminated for three reasons: they are unfair to the average American; they increase the time and cost expended to reach settlement agreements; and because they benefit an unsympathetic category of taxpayers, their elimination is politically feasible. By creating a deductibility exception to the rule that penalties and fines are not deductible as a business expense, Congress has reduced the financial burden on individuals and companies penalized for violating the law. The complexity of the rule’s language invites aggressive taxpayer positions and demands increased government resources in response. Finally, the potential for bipartisan support in closing this loophole, which benefits a politically unsympathetic group, suggests that Congress could take swift action to rectify this inequity.