Finding the Bright Side—Leveraging Government Investigations and Restitution Orders for Long-Term Tax Benefits | Epstein Becker & Green
In many cases, the payment of restitution by a party to a lawsuit involving the government or a government entity creates a tax-deductible business expense under Title 26, United States Code, Section 162(f) ( hereinafter, “Section 162”). When it comes to violations of the False Claims Act, the Anti-Kickback Act, the Stark Act, or even fraud claims and common law contract disputes, understanding how this law works can provide substantial tax benefits in the short term. and long-term to entities facing strong financial recoveries. While it is unlikely that the costs of an investigation or restitution order will ever result in a net financial gain for the entity paying the bill, it is important to understand that the costs of restitution and redress proactive are perceived differently by the two government authorities (that is to say. prosecutors) and tax collectors, compared to other types of remuneration. Acknowledging that there is a difference can, in some cases, help alleviate significant financial burdens.
The key is to appreciate that paying restitution over other categories of expenses provides distinct tax advantages for the entity issuing the check. Specifically, while restitution costs may result in a tax-deductible business expense, other costs such as fines, penalties, and costs associated with a government investigation, (for example. costs of responding to a subpoena or request for a civil investigation) or actual litigation involving the government, are not tax deductible. The conclusion is simple, if you have the ability to pay restitution or penalties/fines – pay restitution because it is a recognized business expense under the federal tax code.
Additionally, offering to pay restitution can also go a long way in fostering a collaborative relationship with government prosecutors who are responsible for:
consider the company’s willingness to make restitution and the steps already taken to do so. A prosecutor may also consider other remedial measures, such as enhancing an existing compliance program or sanctioning violators, to determine whether to charge the business and how to resolve corporate criminal cases. .
Additionally, costs incurred to create or improve an existing compliance program also signal a commitment to ensuring that past mistakes are not repeated. Hopefully, along with effective advocacy, such measures will favorably influence a prosecutor’s deliberations on whether to assess other punitive actions such as fines and penalties, which are not tax deductible. Additionally, expenses “to comply with any law that has been violated or otherwise implicated in the investigation or investigation” are also tax deductible under Section 162. Such expenses may include costs associated with activities such as implementing and maintaining corporate integrity agreements and other less disciplined compliance and oversight mechanisms focused on addressing the specific concern at the heart of a restitution order.
Finally, to qualify for a deduction under Section 162, there must be a clear record of the expenses in current court records. And, further, the onus is on the taxpayer to establish the accounting methodology through documentary evidence beyond a simple court order, which means adapting and preserving the negotiations that informed the settlement process.