Before tax reform, under 162(f), a payment to the government for a violation of the law was deductible unless it was a fine or penalty. 162(f) only came into play when a fine or penalty was involved and excluded any routine payments made to the government.
Thanks to tax reform, it applies to so much more now. Now, 162(f) denies a deduction for a payment made to the government for a violation of the law unless such payment is restitution or made to come into compliance with the law and it is identified as such in a settlement agreement or court order. This means, for example, that the billions of dollars that flow back to Medicare for overpayments may now fall within section 162(f)’s ambit. These overpayments are most often made because of billing or other administrative errors that naturally occur in a complex system and health care providers are doing nothing more than returning the money back to the government. Yet, they will be treated the same as if they paid a criminal penalty. Refunding a Medicare overpayment is just one of countless examples of whether section 162(f) may now come into play.
Luckily, a few weeks ago the IRS issued Notice 2018-23 requesting comment on the new section 162(f) and indicated it would be issuing proposed regulations later. Today, we, along with members of our Health Care & Life Sciences group, filed a comment alerting the IRS to this issue and requesting it issue proposed regulations that clarify and narrow the scope of 162(f). In the meantime, taxpayers would be advised, whenever they are making a payment to the government to consider whether section 162(f) applies and plan accordingly.
The comment we filed may be found here.