The Sexual Harassment Settlement Tax Has Been Re-Written In A Way That Could Hurt Victims

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Even with the #MeToo movement in full swing, victims of sexual harassment and assault are still not fully protected in American society. And now, it turns out that one provision in the GOP tax plan could hurt victims of sexual harassment by making them pay taxes on the full amount of the settlement they receive in nondisclosure agreements (NDAs)— even though they don't receive the entire sum of the settlement.

Here's the problem: If the victims actually received the whole amount of those settlements, that would all be well and good — but they don't. Part of a victim's settlement goes to their attorney for legal fees, and under the current regulation they are only taxed for the money they actually get to keep. According to experts, under the new tax plan, sexual harassment victims who receive settlements under NDAs could be taxed for more money than they actually receive, because it doesn't allow for a deduction for their legal fees.

Tax experts believe this comes down to the rushed way in which the bill was forced through the legislative process and, essentially, sloppy wording. Back in November, Democratic Sen. Bob Menendez of New Jersey proposed an amendment to the Senate version of the bill passed in the Senate Finance Committee in mid-November that would have stopped businesses from being able to write off sexual harassment settlements that were subject to nondisclosure agreements as business expenses. That sounds like a good idea, right? Prior to this suggestion, businesses could write off secret sexual harassment settlements as business expenses — and therefore not pay taxes on that money. Sen. Menendez's amendment aimed to disallow that.

However, when this provision was written into the final bill, the language actually made it worse for the victims of sexual harassment rather than targeting the people paying the settlements. According to an op-ed that law professor Anthony C. Infanti wrote in The Hill, the Republicans' rush to put this bill into law without the proper discussion over it is the main reason why this poorly written, and ultimately very damaging, element of the bill is now becoming law.

The sloppy language in the provision takes its focus away from the businesses paying the settlements, and instead puts the burden onto the victims. The current law meant that a sexual harassment victim wouldn't have to pay taxes on the part of their settlement that paid for their legal fees. Only the amount that they received directly was taxed, and then the remaining portion was just taxed as a part of the attorney's income.

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Now, though, the bill turns that on its head. According to the text of the bill in section 13307,

No deduction shall be allowed under this chapter for— (1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or (2) attorney’s fees related to such a settlement or payment.

Instead of using language that clearly refers to the organization paying the settlement, it instead refers to the person receiving the settlement: i.e., the victim of sexual harassment.

According to the tax law experts who trawled through the whole document, this amounts to an additional punishment for victims who want to keep their suit secret for any reason — since it only applies to suits bound by nondisclosure agreements. In cases where the settlement and the legal fees are significant — which is not rare — then it could even discourage the victim from coming forward, as they could be forced to pay taxes that even amounted to more than the money they would receive in settlement. Essentially, it could make them pay to file the lawsuit against their harasser.

Infanti also stresses that even in its attempt to target the perpetrators of sexual harassment, it's not broad enough in scope. It only refers to businesses that are subject to taxes anyway; if the settlement is coming from a tax-exempt organization like the Catholic Church or an entity that doesn't pay taxes like the U.S. Congress, then the bill doesn't affect those proceedings at all.

The idea behind this provision was well intentioned. Perpetrators and companies that employ them should not be able to claim secret sexual harassment settlements as business expenses. The tax bill could have enshrined that provision into law. Instead, a rushed process and its resulting language could now end up penalizing the victims rather than the perpetrators.