New IRS Rulemaking Impacts FCA Settlement Payment Deductibility

Effective January 14, 2020, the Internal Revenue Service ("IRS") implemented a final rule (the "Final Rule") concerning the tax deductibility of settlement payments made to the government.  This rulemaking followed a legislative update to the Internal Revenue Code of 1986 ("IRC"), which was implemented as part of the 2017 federal tax overhaul and specifically included a prohibition against deducting certain settlement payments.  Relative to the IRS proposed regulations released in May 2020 (the "Proposed Rule"), and as further detailed below, aspects of the Final Rule favor taxpayers, relaxing certain restrictions contemplated under the Proposed Rule.  Those making payments in connection with litigation or governmental investigations, including False Claims Act ("FCA") investigations by the Department of Justice ("DOJ"), should consider the Final Rule's impact on their approach to documenting a settlement or related payment.