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Washington, D.C. – A new factsheet from the U.S. Public Interest Research Group documents how corporations that have been charged with harming consumers through mortgage violations, price-fixing, racial discrimination and other charges have typically been able to write off the cost of their misdeeds on their taxes.
While federal law forbids companies from deducting public fines and penalties from their taxes, payments made as part of a settlement can be treated differently. According to the IRS, companies that cut deals with an agency to resolve charges through a legal settlement typically manage to deduct the penalties as a tax write-off unless specifically forbidden from doing so. In essence, companies are allowed to receive a tax break for their wrongdoing without the public ever knowing it.
“This fact sheet underscores why when government agencies reach settlements with companies that break the law, they should disclose the terms of those deals to the public,” said Sen. Elizabeth Warren (D-MA). “Anytime an agency decides that an enforcement action is needed, but it is not willing to go to court, that agency should be willing to disclose the key terms and conditions of the agreement. Increased transparency will shut down backroom deal-making and ensure that Congress, citizens and watchdog groups can hold regulatory agencies accountable for strong and effective enforcement that benefits the public interest.”
“Unfortunately, this ‘wrongdoing tax break’ is far from rare. In fact, the corporate practice of taking a tax deduction for settlement payments made to federal agencies is ubiquitous,” said Francisco Enriquez, Tax and Budget Associate for U.S. PIRG. “For every dollar that corporations claim in tax deductions for their wrongdoing, the public must pick up the tab in the form of cuts to public programs, higher taxes or higher government debt.”
“Unfair or deceptive lending causes real harm to borrowers who find themselves trapped in debt,” said Gary Kalman, Federal Policy Director at the Center for Responsible Lending. “And when bad actors get caught, it adds insult to injury to treat the legal settlements for their misconduct as a tax write-off,” he added.
The new factsheet provides an analysis for how financial institutions like Goldman Sachs, Marsh and McLennan, and Bank of America manage to secure massive tax deductions for misdeeds that victimize consumers around the nation. The factsheet also provides a set of recommendations that detail how to close the egregious settlement loophole.
“Americans don’t deduct their parking tickets or library fines from their taxes. Corporations shouldn’t be able to deduct their settlements for wrongdoing, either,” said Enriquez.
The factsheet release comes on the heels of two bipartisan Senate bills, the Government Settlement Transparency and Reform Act (S. 1654) and the Truth in Settlements Act (S. 1898) that, together, go a long way towards both restricting the ability of corporations to negotiate tax-deductible settlements behind closed doors.
You can read U.S. PIRG’s research report on the tax implications of legal settlements, “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs.
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