Law & Legal & Attorney Tax Law

Can an IRS Filing Late Penalty Be Deducted as an Expense?

    Identification

    • You cannot deduct IRS penalties and fees under any circumstance, according to IRS Publication 529. The IRS does not want to give you an incentive for not filing your return on time or for any instance where you violate the law. This goes for personal payers and those who own a business.

    Appeal a Penalty

    • The IRS lets you appeal any penalty, especially when you feel the penalty is not just. Failure to file a return penalty is one of the most common penalties, so the IRS has an online tool to help you through the appeal process. In general, you need a reasonable cause for the failure to file, such as an unexpected illness that kept you in the hospital during the tax filing season or if the IRS has lost your return. You cannot use ignorance of the filing date as a reasonable excuse.

    Prevention

    • In the future, fill out Form 4868 for a six-month extension to avoid late filing fees. You can use Form 4868 for any reason, even if you just don't feel like filing yet. However, you must make an estimated tax payment. If you pay at least 90 percent of your actual tax due, the IRS won't impose a late payment penalty. If not, you will incur a fee of 0.5 percent of your tax bill for each month you are late paying. You must file Form 4868 by the regular tax filing due date.

    Tip

    • Financing your tax bill usually costs less than incurring late filing and payment penalties, and you may even be able to deduct the interest payments. For example, you can pay your tax bill with a home equity loan and deduct up to $100,000 in interest payments. You can also deduct state taxes on your federal return, but not late payment or late filing fees.

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