Are Back Taxes Tax-Deductible?

Perhaps the only thing worse than wading through an assortment of complex tax law is to finish filing your taxes and discover that you owe money to the Internal Revenue Service. And although it is true that there are avenues available for you to reduce the amount you owe, it is absolutely not true that you can reduce your back tax by deducting it on your return.

Tax deductions allow taxpayers to recapture various costs incurred during the tax year, thereby reducing their taxable income. Business deductions are largely for costs incurred to produce income, while personal deductions are not connected to productivity. Examples of personal deductions include those for medical expenses and the home mortgage interest. These deductions are often thought of as tools to either encourage behaviors that benefit society, while other deductions were implemented to relieve the financial burden on taxpayers.

Back taxes are taxes that you owe the government but have not paid. When a taxpayer fails to pay tax before the deadline, the taxpayer isn’t in compliance with IRS tax law. To encourage voluntary compliance, the IRS assesses penalties and interest on back taxes. For example, the failure-to-pay penalty is one-half of 1 percent of the tax owed for as long as the tax remains unpaid. The IRS does not allow for the deduction of back taxes because that would encourage, rather than discourage, taxpayers to be noncompliant with IRS tax law.

Although taxpayers can’t use deductions as a method to reduce tax, there are other avenues. For instance, you may be able to substantially reduce your tax burden by requesting the removal of your penalties. To do this, complete IRS Form 843 and file the form wherever you would be required to file your current year tax return. Generally, the IRS will allow a first-time abatement of penalties if a taxpayer can demonstrate a reasonable cause for the infraction. An example of a reasonable cause for filing late might include overseas travel, military deployment, illness or incarceration. The IRS may request substantiation of your claim, so be prepared to provide it. In addition, you can use IRS Form 656 to request an offer in compromise which, if approved, will allow you to negotiate a lower tax settlement with the IRS. There is a $150 fee for requesting an offer in compromise.

Although you cannot deduct back federal taxes, you can deduct state, local and foreign income taxes; state and local sales taxes; state and local personal property taxes; and state, local and foreign real estate taxes.