Are IRS Penalties Tax Deductible?

The U.S. tax code does not allow taxpayers to deduct penalties assessed by the Internal Revenue Service (IRS). IRS penalties are typically assessed for violations of tax laws, such as misreporting income or claiming false deductions or tax credits. The IRS typically assesses penalties along with interest on the balance owed by a taxpayer, and this interest is not tax-deductible.

The federal income tax filing due date for individuals has been extended from April 15, 2021, to May 17, 2021. Payment of taxes owed can be delayed to the same date without penalty. Your state tax deadline may not be delayed.

Key Takeaways

  • Taxpayers cannot deduct IRS penalties on their tax return.
  • Penalties are commonly assessed for a failure to file or pay and for dishonored checks.
  • Penalties vary according to the type of violation and may accrue until the account is fully paid or until the taxpayer enters into an approved payment plan.
  • Extensions filed via Form 4868 extend the tax filing deadline, but do not extend the deadline to pay income taxes.

IRS Penalties

Fines and penalties a person owes to the government for violating local, state, and federal laws are never deductible. According to the IRS, the goal of its penalties is to discourage illegal activity related to federal taxes. Penalties also discourage people from neglecting their obligations to file or pay. The IRS typically sends a notice to a person after a tax audit and assesses both penalties and interest on any unpaid amounts.

Although taxpayers are not allowed to deduct penalties, they may qualify for relief for extenuating circumstances. If approved by the IRS, all or a portion of the penalty may be relieved. However, interest still accrues until the amounts owed are fully paid.

Failure-to-pay penalties are assessed on the tax owed after the due date, for each month or partial month, until the taxpayer's account is resolved. The IRS allows installment agreements to pay off the outstanding balance and to stop the assessment of failure-to-pay penalties.

Most often, penalties are assessed for dishonored checks, or for failing to file your tax return by the required due date, failing to pay the full amount of taxes owed by the due date, or failing to pay the proper amount of estimated taxes. Penalties vary according to the type of violation.

For example, a penalty of 5% of the tax required is assessed when the taxpayer fails to file on time, and it is charged each month that the return is late, up to five months. The IRS assesses a 0.5% penalty on taxes not paid by the tax filing due date, which is generally April 15. The IRS website notes: "If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month or part of a month that your return was late, up to 25%."

Taxpayers have the option to extend their tax filing deadline by filing an extension using Form 4868. However, an extension on filing your return does not extend the deadline for your tax payments.

On Feb. 22, 2021, the Internal Revenue Service (IRS) announced that victims of the 2021 winter storms in Texas will have until June 15, 2021, to file various individual and business tax returns and make tax payments. As a result, affected individuals and businesses will have until June 15, 2021, to file returns and pay any taxes that were originally due during this period. This includes 2020 individual and business returns normally due on April 15, as well as various 2020 business returns due on March 15.

Legal Fees Deductibility

According to IRS Publication 529, legal expenses incurred in attempting to produce or collect taxable income or paid in connection with the determination, collection, or refund of any tax are no longer deductible.

You can deduct expenses of resolving tax issues relating to profit or loss from your business (Schedule C), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule.

However, expenses for resolving nonbusiness tax issues are miscellaneous itemized deductions and are no longer deductible.

Other Penalties

While IRS penalties cannot be deducted, other penalties related to business activities can be deducted by companies on a tax return. For instance, penalties paid by a manufacturing company due to nonperformance on a construction contract are typically deductible as a business expense.

Article Sources
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  1. IRS. "Tax day for individuals extended to May 17; Treasury, IRS extend filing and payment deadline."

  2. Internal Revenue Service. "Collection Procedural Questions 3."

  3. Internal Revenue Service. "Apply Online for a Payment Plan."

  4. Internal Revenue Service. "Will I be charged interest and penalties for filing and paying my taxes late?"

  5. Internal Revenue Service. "Common Penalties for Individuals."

  6. Internal Revenue Service. "Extension of Time To File Your Tax Return."

  7. Internal Revenue Service. "Victims of Texas winter storms get deadline extensions and other tax relief."

  8. Internal Revenue Service. "Publication 529: Miscellaneous Deductions (Rev. December 2019)."

  9. Internal Revenue Service. "Publication 535 (2019), Business Expenses."

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