Taxpayers could be burdened with Bank of America’s upcoming Justice Department settlement

True value of settlement could be diminished due to tax breaks and “fake costs”


With the Department of Justice expected this week to announce a $16 billion to $17 billion legal settlement with Bank of America to resolve charges of deceptive mortgage practices that contributed to the financial collapse, the real value of this deal for the public nonetheless remains uncertain. In fact, depending on whether and how much of the settlement is tax deductible, billions of dollars could end up being shouldered by ordinary taxpayers.

“To understand how significant the BoA settlement really is, people need to ask how many billions the bank is allowed to write off as tax deductions, and how much of the announced figure includes ‘fake costs’ — costs the bank would have incurred anyway to protect its bottom line,” said Phineas Baxandall, Senior Analyst at the U.S. Public Interest Research Group.

A $16 billion dollar settlement would likely be worth $5.6 billion for Bank of America. Ordinary taxpayers would need to make up for each dollar lost to these tax deductions – through cuts to public programs, higher taxes, or more national debt.

Recent Justice Department agreements signed with JPMorgan, Citigroup and others over mortgage practices have allowed banks to write off most of the payments as tax deductions, shifting the burden back toward ordinary Americans. The multi-billion dollar figures announced by the Justice Department have also included the costs to banks of writing down losses from underwater mortgages that weren’t going to be repaid anyway, or providing counseling to help distressed homeowners pay off debt to the bank.

“The so-called soft-dollar relief is worth securing in settlements, but let’s not pretend these are all new dollars that Bank of America is putting on the table,” said Baxandall. “The public wants banks to atone for improper practices that led to the financial crisis. Americans can’t judge how well the Justice Department is holding Bank of America accountable unless the announced settlement amounts are real.”

Recent bipartisan bills in Congress would make settlements more transparent and restrict their tax-deductibility. The Truth in Settlements Act (S. 1898 – fact sheet) has passed through committee and would require agencies to report the expected after-tax value of settlements if they are allowed as tax deductions. The bill would also require agencies to post online a variety of details about settlements to make their true value apparent to the public. The bill is cosponsored by Sens. Warren and Coburn in the Senate, and a counterpart bill is sponsored by Representatives Cole and Cartwright in the House.

Another bipartisan bill in the Senate (S. 1654) cosponsored by Senators Jack Reed (RI-D) and Chuck Grassley (IA-R) would restrict tax deductibility for settlements and require agencies to spell out the intended tax status of settlements. A similar bill in the House sponsored by Representative Peter Welch (VT-D) would also forbid such deductions.

“Payments made in lieu of penalties for misconduct against the public should not be treated as tax deductions,” said Baxandall.

An April poll released by the U.S. Public Interest Research Group Education Fund, and conducted by Lake Research Partners, found that substantial majorities across party lines overwhelmingly disapprove of settlement tax write offs and want federal agencies to be more transparent about them.

U.S. PIRG has been watchdogging the tax implications of out-of-court settlements. You can read U.S. PIRG’s report on the topic here: “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs.

U.S. PIRG has created a fact sheet on Wall Street settlement tax deductions.