UPDATE: IRS Says NDAs Don’t Prevent Plaintiffs from Deducting Attorneys’ Fees in Sexual Harassment Settlements

The 2017 Tax Cuts and Job Act (the “Act”), contained troubling language for plaintiffs seeking to settle sexual harassment claims – section 162(q). In an apparent effort to shine light on workplace sexual harassment, the Act prohibited the deduction of attorneys’ fees in the settlement of such claims when the settlement contained a nondisclosure agreement (“NDA”).

As we wrote back in August, many viewed the Act as effectively, and unfairly, penalizing sexual harassment plaintiffs. You can find our article here. Luckily for sexual harassment plaintiffs, the IRS recently made clear its view that the Act does not penalize plaintiffs.

On February 28, 2018 the IRS issued guidance that plaintiffs settling sexual harassment claims are permitted to deduct attorneys’ fees even if the settlement contains an NDA. You can find the IRS guidance here. This guidance provides some reassurance for the time being, but it is no substitute for a long-term legislative fix to section 162(q).