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GAO Wants More Scrutiny of Some Tax Breaks

Oct. 19, 2005 (Associated Press) The Internal Revenue Service should work with federal agencies to make sure companies follow the rules that prohibit tax deductions for fines and penalties paid in civil settlements, government auditors said in a report Tuesday.

Agencies negotiate civil settlements when companies violate laws and regulations. The agreements sometimes call for payments to the government and others harmed by the violations, and additional fines and penalties.

Federal laws say payments made in compensation can be deducted from a company's taxes. Fines and penalties cannot, but the distinction between the two isn't always clear, the Government Accountability Office said in a report to lawmakers.

The GAO, the investigative arm of Congress, said four agencies that account for many of the largest agreements negotiated $9 billion in civil settlements during 2001 and 2002. Surveys returned by companies that account for 34 of those settlements showed 20 deducted some or all of their $1 billion in civil settlements from their tax returns.

Two companies said they erred in deducting penalty payments totaling about $1.9 million and planned to file amended tax returns.

The findings alarmed the leaders of the Senate Finance Committee, who announced plans to introduce legislation clarifying the law and requiring businesses to report settlement information to the IRS. Both said the tax deductions may soften the impact of fines and penalties.

"Letting companies deduct settlement payments from their income taxes takes away the sting," said Chairman Charles Grassley, R-Iowa.

"It is galling that artfully crafted settlement agreements create loopholes that allow wrongdoers to escape the full impact of fines and water down any deterrent effect," said Sen. Max Baucus of Montana, the panel's top Democrat.

Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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