According to the Tax Court, a 100% penalty for failing to collect or pay payroll taxes isn’t deductible. Federal penalties are never deductible.
After an S corporation did not pay its employment taxes and later went out of business and had its corporate privilege revoked by a state, the IRS assessed the trust fund recovery penalty against the couple who owned the firm.
The liability was paid, and the couple treated the payment as coming from the S firm, which deducted the amount as a business expense and passed it through to its owners on the K-1. The Court revoked the write-off because the S firm was defunct. Even if it was in existence, the steep penalty would still be a nondeductible fine.
Brown, TC Memo. 2017-18