History of Tax Penalties

• The IRS first developed tax penalties to curtail the practice of Americans underpaying or entirely ignoring tax obligations. Now, there are 104 different penalties, which are assessed for things like purposefully underpaying income taxes, failure to pay income taxes, and failure to file a tax return, among others. Most IRS penalties are civil, although there are criminal penalties that can result in jail time in addition to any monetary penalties.
  
  

Income Tax Penalties & Deductions

• Most IRS penalties come from income taxes, either from being improperly filed, filed and not paid, and not filed at all. In response, the IRS has 56 penalties specifically aimed to decrease the amount of non-filers and non-payers, most of which include fines. While previously, some of these fines were tax-deductible, they are no longer permitted as a deduction.
  
  

Back Taxes & Deductions

• If you were levied a penalty for underpaying or failing to pay your income taxes, you are required to pay the amount you owe in full within a specified period of time. You are generally allotted 30 days to pay, although the IRS may extend the due date or, more commonly, develop a monthly payment plan instead. Any past due income tax cannot be listed as a deduction, as this is money you would already have already owed had you not failed to properly file and pay your taxes.
  
  

Tax Interest & Deductions

• The IRS typically charges interest to individuals who fail to pay their taxes in full and on time. The interest rate and total amount will vary depending on your particular circumstances. While in previous years, the IRS allowed some individuals to claim the interest paid on past-due taxes as an itemized deduction, this is no longer allowed.
  
  

State Back Taxes & Deductions

• State income taxes are separated and differ from federal income taxes. State taxes are taken separately from your paychecks, and are owed on top of your federal taxes. There are separate penalties and fines that can be levied against you for failing to pay or fraudulently declaring lower income at the state level, all of which are set and enforced by the state. As with overdue federal income taxes, state back taxes cannot be deducted from your state income tax return. However, you can list any back state taxes owed as an itemized deduction on your federal tax return for the year they were paid. This only applies to back due taxes; like federal penalties and interest owed, state tax penalties and interest are not tax-deductible at either level.