Not keeping up with tax payments can land you in a difficult financial situation. If you owe the IRS for past years, it's a debt that doesn't go away, even in bankruptcy. Another problem is the mounting interest that accrues on past-due taxes, as well as IRS penalties.
Tax Payments and Deductions
The IRS does not allow you to deduct back taxes from your taxable income; federal taxes are never deductible. Nor can you deduct penalties or interest levied by the IRS. Federal income tax payments are not deductible on state returns, nor are they considered a deductible business expense.
Tax Preparation Expenses
The only possible federal deduction in connection with back tax payments would be the fees charged you by a tax-preparation company or tax adviser. If you hire an attorney or accountant to deal with the issue, then any payments, whether flat-fee or hourly billings, would be deductible, as long as the advisers are working strictly on your taxes. This deduction, combined with all others subject to the "2 percent rule," must be greater than 2 percent of your adjusted gross income. You can deduct only the portion of the expenses over this threshold.
State Tax Payments
The IRS does allow you to deduct state taxes you pay, as long as you deduct them for the year in which you actually wrote the check. If you pay an overdue state tax in 2012 for a return dating back to 2010, then you must take the federal deduction for 2012. This deduction extends to foreign income taxes (for which you may be able to claim a tax credit), property taxes, and state sales taxes (if you don't deduct state income taxes).
Penalties and Interest
More generally, you can't deduct penalties or interest you pay on any tax, whether it's state or local. Since the purpose of a penalty is to discourage tax avoidance, the IRS will not allow you to mitigate the financial damage from not following federal or local law.
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