Is the money I paid as the result of a tax audit deductible?

March 11, 2022 by Glynis Miller, CPA, MST
Money and paperwork on a desk

I was audited and had to pay back money. I payed a lump sum last year for a previous year. Is that deductable? Thanks!

-Kurt, MO



Hi Kurt,

Your question: “I was audited and had to pay back some money. I paid a lump sum last year for a previous year. Is that deductible?”

Whether an amount paid for taxes is deductible depends on the type of taxes involved. Types of taxes include federal or state income taxes, payroll taxes, sales taxes, or other tax assessments. However, since you do not indicate whether you had a federal or state audit, it will be assumed the audit was on your personal tax return and will address both federal and state taxes paid. It should be noted that when you are audited by either the IRS or a state taxing agency, it is important to review any other tax returns for that same year to ensure the audit adjustments are taken into account on the other tax returns for that year. For example, if you had an IRS audit, you should be reviewing your state return; if the changes affect items on your state return, it should be amended (usually within 90 days for most states).

Federal Returns

Taxpayers filing a federal tax return are allowed to either claim a standard deduction or itemized deductions on Schedule A. One potential item allowed on Schedule A is a deduction for State and Local Taxes (SALT) paid. When claimed, a taxpayer should report the total amount paid for state income taxes; any penalties or interest paid would not be deductible. The amount claimed for state income taxes may be limited depending on the tax year involved. This limitation is due to changes from the Tax Cuts and Jobs Act of 2017 (TJCA). Changes in the TCJA capped SALT deductions at $10,000 for tax years 2018 through 2025. Any deductible state taxes claimed are reported in the tax year they are paid. For example, if you paid additional state taxes in 2021 on a state audit of your 2020 return, the amount paid would be deductible on your 2021 Schedule A, Itemized Deductions if you itemize your deductions.

Any federal taxes paid due to a federal audit are not deductible on your federal tax return.

State Returns

Most states do not allow a deduction for any federal taxes paid. However, six states have allowed a deduction for certain federal taxes paid at one time or another. Such deductions include federal income taxes paid, Social Security and Medicare (FICA) withholding taxes, or self-employment taxes. These six states are Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon. Each state will have its method of calculation to arrive at the allowable deductible amount, and the rules could be different depending on the tax year. Generally, the deduction is usually calculated on the state tax return in the same year the federal taxes were assessed. So, taxes from an audit for 2020 but paid in 2021 might require amending the 2020 tax return to recalculate any allowable deduction.

Since each state has its requirements, whether or not you have deductible taxes paid would depend on which state you were a resident of, where the income was earned, and whether the specific taxes are deductible according to that state. Thus, the appropriate state rules for the tax years involved should be consulted to determine any allowable deductions. Information you provided indicates you appear to be in Missouri; if so, you may want to review the Missouri Department of Revenue’s website for specific information on your circumstances. The link is https://dor.mo.gov/taxation/individual/tax-types/income/fit-deduction.html.

We hope this answers your question.

Sincerely,
Glynis C. Miller

Tags: audit

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Glynis Miller, CPA, MST
Tax Content Developer

 

Glynis began her career with TaxAudit in February 2006 as a Seasonal Tax Return Reviewer. In December of 2008, she joined the permanent staff as an Audit Representative. Glynis has been an instructor for both continuing education tax classes and various staff training classes since 2009. Glynis holds a Bachelor of Science Degree in Accounting and a Master’s Degree in Taxation. Prior to joining TaxAudit, Glynis worked in private and public sectors of accounting. She has worked at regional accounting firms preparing tax returns, financial statements, and audit services. Her professional career has spanned over a wide variety of industries from advertising, construction, commercial real estate, farming, manufacturing and more. In 2017, Glynis joined the Learning and Development Department as a Tax Content Developer. She is providing a wealth of accounting and tax knowledge, writing skills, current job awareness, and a very cross-functional skillset to the team. 


 

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