Today TaxMama® hears from Wayne in the TaxQuips Forum, with this question. “I received a notice from the IRS that my 2011 tax return did not include a withdrawal from my 401k. So I had to pay roughly $3,500 in taxes and penalties for this omission by my tax preparer. Is this $3,500 payment deductible on my 2013 tax return?
Dear Wayne,
So sorry to give you the bad news.
Federal taxes are never deductible.
And penalties are never deductible.
When it comes to personal interest expenses? Those were fully phased out in 1990 with the Tax Reform Act of 1986.
Now, as to the preparer being to blame for the taxes? You would have owed them on your 2011 tax return anyway. You would also have owed the 10% early withdrawal penalty from the 401k, along with the underpayment of taxes penalty.
However, the additional underpayment of taxes penalty and the interest after April 15, 2012…now that…the preparer might have caused. But, did your preparer actually know about this withdrawal? And if so, did you ask why it wasn’t reported? It’s quite possible that there should not have been a tax or a penalty or interest – if you rolled the funds over into an IRA. If that’s the case, you might still be able to get your money back if you file a claim for refund within 2 years of your payment.
And remember, you can find answers to all kinds of questions about deducting taxes and other tax and business issues, free. Where? Where else? At www.TaxMama.com.
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Hi Brian
When the IRS issues assessments on the CP 2000 notices for under-reporting, they don’t add any penalties.
The only penalties involved are the early withdrawal – which cannot be abated if you’re under the minimum age. And the underpayment of estimated tax penalty/late payment penalty – which cannot be abated since he didn’t make his estimated tax payments before April 15th – and didn’t pay it since.
The kinds of penalties that abatement works for are negligence penalties, accuracy penalties, specific types of late filing penalties (like per partner/per month late K-1 penalties).
But I like that you’re thinking like that!
Hugs
Eva
This seems like a good time to use the “one time penalty abatement.” Of course, if I was the preparer being thrown under the bus, I’m not so sure that I would make that last abatement request.