This week, U.S. Senators Elizabeth Warren (D-MA) and James Lankford (R-OK) reintroduced a bill designed to provide the public with more information about settlement agreements between federal agencies and companies and individuals. The bill, called the Truth in Settlements Act, was first introduced in 2014. In September 2015, it was unanimously passed by the Senate but never passed by the House.
The bill requires federal agencies to make specific disclosures about settlement agreements involving payments of $1 million or more. Notably, it will require federal agencies to disclose whether any portion of a settlement payment is tax deductible or whether the settlement payment can be offset by “credits” for certain conduct. Typically, settlement agreements of the sort described by the bill include language specifically noting that the government takes no position on the tax treatment of the settlement payment.
Currently, the U.S. tax code allows companies to claim a tax deduction for settlement payments classified as “restitution” or “compensation,” but not for payments classified as “penalties” or “fines.” As a result, companies and individuals are permitted to write-off those portions of settlements with the government that are not so characterized. In False Claims Act (FCA) cases, the government frequently avoids providing a written explanation for how settlements are calculated.
Similarly, federal agencies may offer “credits” to the settling party for taking specific actions in connection with the settlement. These credits are then used to offset the cost of the settlement amount. A statement from Senator Warren’s office calls it “misleading” for federal agencies to tout large settlement amounts without disclosing how tax deductions or “credits” reduce the final amount of the settlement award to taxpayers.
“Government accountability requires transparency, and that’s what this bipartisan bill provides,” Senator Warren said. “The Truth in Settlements Act will shut down backroom deal-making by shining a light on federal agency settlements with lawbreaking companies. More transparency means Congress, citizens and watchdog groups can better hold regulatory agencies accountable for enforcing laws so that everyone – even corporate CEOs – are equal under the law.”
In addition to requiring federal agencies to reveal how settlement payments are classified, the bill also requires companies entering these settlements to disclose in their SEC filings whether they have claimed a tax deduction for any portion of a settlement payment. The bill will also require federal agencies to provide an explanation any time a settlement agreement is deemed “confidential” and to report statistics on the number of confidential settlements entered into each year.