New study compares federal agencies’ transparency and tax practices
US PIRG Education Fund
A new study by United States Public Interest Research Group Education Fund (U.S. PIRG) analyzes which federal agencies allow companies to write off out-of-court settlements as tax deductions and which agencies are transparent about these deals. The study found that five of the largest government agencies that sign settlement agreements with corporations rarely specify the tax status of the resulting payments. Billions of dollars are allowed to be written off as cost of doing business tax deductions. Additionally, the report found that major government agencies do not consistently disclose the details of corporate settlement agreements.
“The human cost of corporate misconduct is very real, from damaged ecosystems to devastated economies. When corporations and federal agencies settle out of court, the impact of the settlement should be real, too. Federal agencies must ensure that tax deductions don’t undercut the purpose of such deals and that the public knows their true after-tax value,” said Michelle Surka, program associate with U.S. PIRG Education Fund and one of the authors of the report.
When a corporation is accused of committing wrongdoing that hurts the public, the corporation will typically settle any allegations out of court via a settlement deal negotiated and signed by a government agency. Unless otherwise specified in the agreement, these deals often allow the signing corporations to claim tax deductions for the payments they make in connection with the alleged wrongdoing.
The report examines and compares hundreds of settlements signed between 2012 and 2014 by the Department of Justice, the Securities and Exchange Commission, the Environmental Protection Agency, the Department of Health and Human Services, and the Consumer Financial Protection Bureau. The analysis shows that these government agencies generally do not clarify the tax status of payments extracted from corporations, leaving billions of dollars connected to allegations of wrongdoing available to be written off as ordinary cost of doing business tax deductions.
“This important new study shows how federal agencies run the gamut in whether they permit enforcement fines to be tax deducted and how important it is that more attention be paid to how corporate deals are structured and regulated,” said Brandon Garrett, Law Professor at the University of Virginia and author of Too Big to Jail.
The key findings of the report are:
· Of the five agencies examined, none have a publicly announced policy for how to address the tax status of the settlements they sign.
· For the ten largest settlements announced by major agencies during the previous three years, companies were required to pay nearly $80 billion to resolve federal charges of wrongdoing, but can readily write off at least $48 billion of this amount as a tax deduction.
· Some agencies consistently act to limit tax deductibility for settlements they negotiate, while others rarely address the issue. The EPA and CFPB are most consistent in ensuring that at least portions of the settlements they sign are specifically non-deductible.
· Of all federal agencies, the DOJ signs most of the largest settlements. Based on the DOJ cases for which settlement text is available between 2012 and 2014, only 18.4 percent of settlement dollars were explicitly non-deductible. Similarly, only 15 percent of settlement dollars negotiated by the SEC included language to ensure against settlement deductions, at least for those settlements with publicly available language.
· The CFPB and the EPA had the strongest transparency practices, making the vast majority of settlements they sign publicly available online, while the SEC and the DOJ are less consistent about disclosing the text of their announced settlements. At the SEC the number of announced settlements where text was disclosed increased from 55 percent in 2012 to 87 percent in 2014. At the DOJ meanwhile, disclosure decreased from 35 percent to 25 percent of announced settlements during the period.
“Taxpayers ultimately pick up the tab for any write-offs corporations can claim for their settlement agreements in the form of higher individual taxes, cuts to public programs, and more national debt,” said Surka. “Ordinary Americans shouldn’t have to pay for corporate misconduct.”
The report offers several suggestions for how federal agencies like the Department of Justice can address tax status when signing settlement agreements with corporations. Federal agencies should deny all tax deductions for out of court settlements, and only negotiate them in to deals with the clearest justifications for why deductions are in the best interest of the public. The report also calls on agencies to publicly post all agreements so the American people can better scrutinize the deals that are signed on their behalf.
You can read the full report at: http://uspirgedfund.org/reports/usp/settling-lack-accountability