Typo in tax reform law could penalize harassment victims

Last year’s comprehensive tax reform bill was rushed through Congress in record time. Predictably, that meant errors crept into the legislation—and some of them have had severe consequences.

As part of a compromise with their Democratic colleagues, Republican senators shepherding the Tax Cuts and Jobs Act through the Senate included a provision championed by Sen. Bob Menendez (D–N.J.). It barred employers from deducting their legal fees for sexual harassment settlements that require victims to sign nondisclosure agreements.

The provision became law, but a typographical error snuck into the legislation. It refers to a chapter of IRS regulations, not a specific section. As a result, harassment victims who sign settlement agreements may not be able to deduct their legal fees.

For example, a $100,000 settlement with legal fees of $40,000 should leave the victim with $60,000 of net income. But one interpretation of the new law would require the victim to pay tax on all $100,000.

GOP lawmakers are examining ways to repair the language, but such a move would require 60 votes in the Senate. Similar efforts by Democrats to repair language mandating subsidies to insurers under the Affordable Care Act met with a Republican stonewall.

In the meantime, how victims are taxed on settlements involving sexual harassment and other types of discrimination is unclear. The uncertainty could have a chilling effect on harassed employees. Savvy lawyers may look for other types of discrimination charges to avoid the tax issue altogether.