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Payments to settle fraud charges shouldn’t be tax deductible

Several banks that recently settled cases for mortgage abuses will be able to deduct those settlement payments as “business expenses,” making those settlements less painful for the banks than they appear, noted New York Times’ columnist Gretchen Morgenson in her Jan. 12 article, “Paying the price, but often deducting It.”

Unfortunately, that’s not unusual. In many settlements with the government, companies take tax deductions for the millions and billions of dollars they pay to settle fraud and other civil and criminal liabilities.

The Securities and Exchange Commission (SEC), however, does not allow such deductions in settlements involving the SEC.  In one case cited by Morgenson, the Department of Justice also disallowed any deductions.

Senator Charles Grassley tells Morgenson that he believes, “any portion of a settlement that’s intended to be a penalty should include language clarifying it isn’t deductible. Otherwise, the government’s punishment will have less sting than intended.”

Government agencies ought to consider following the SEC’s lead. No extra money is brought into the Treasury by allowing the deductions. The deductions also reduce the efficacy of the punishment and send the rather disappointing message that paying to settle cases of fraud and other liability is just a normal “business expense” in the United States.

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