2017 Tax Cuts and Jobs Act changed rules relating to when penalties/fines paid to or at the direction of a government agency can be deducted as a business expense. Certain payments to government agencies, such as the EEOC, as part of employment lawsuit settlements, are affected. To this end, Agencies will start issuing information returns, IRS Form 1098-F, to affected employers.

As part of the 2017 Tax Cuts and Jobs Act (Act), Congress enacted Internal Revenue Code (Code) section 6050X, which requires government agencies (and certain nongovernmental regulatory agencies) to issue information returns to payors of fines and penalties to the government. The IRS created IRS Form 1098-F to report such payments. The obligation to issue Form 1098-F began with the 2022 tax year, meaning the first 1098-F forms are due in early 2023.

Limitations on deductions for fines and penalties and exceptions to such limitations

As background, under the Act, Congress changed the rules relating to when a penalty or fine paid to or at the direction of a government agency could be deducted by a taxpayer as an ordinary and necessary business expense under Code section 162(f).¹ Specifically, no deduction is allowed for any amount paid to, or at the direction of, a government or specified nongovernmental entity for the violation of any law. The general rule does not apply to the following exceptions:

• Amounts that constitute restitution (including remediation of property);
• Amounts paid to come...

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