Can I deduct IRS penalties and interest on my tax return?

Generally, no. IRS penalties are not tax-deductible under any circumstances. They are considered personal expenses and cannot be deducted on individual or business tax returns. IRS interest is similarly non-deductible for individuals. However, there are limited exceptions for businesses: interest on business tax underpayments may be deductible as a business expense in some situations, though the Tax Cuts and Jobs Act limited the deduction for business interest expense. State and local tax penalties and interest follow similar rules and are generally not deductible. The non-deductibility of penalties is intentional, as allowing deductions would reduce their deterrent effect. This makes penalty abatement even more valuable, since every dollar of penalty removed is a dollar saved with no tax benefit to offset it. If you owe $10,000 in penalties, getting them abated saves you $10,000; there's no tax deduction that could accomplish the same thing. This is why exploring First Time Penalty Abatement and reasonable cause arguments should be a priority in any tax resolution strategy.