S-Corp taxes from previous C-Corp

[LouD]

Working on a new client S-Corp return for 2007 - in 2006, previous CPA and client converted their C-Corp to the S-Corp with no built in gain issues that needed to be resolved.

During 2007, client went thru IRS audit for the C-Corp/S-Corp for 2004, 2005 and 2006 (with large errors on the 2004 and 2005 returns) resulting in corporate taxes due of $100k with $15k of interest and $20k of penalties (which is why they are my new client)

How do I treat these payments on the 2007 S-Corp return - penalties and federal taxes aren't deductible and I'm thinking that I should handle them on the Sch M-1, but I'm thinking that the interest amount should be deductible?

Also, it doesn't look like the previous CPA amended the returns for the state amounts that will be due (AZ will no doubt send an invoice in the next few months based on the audit report they will get from the IRS) - can I accrue these taxes and interest amounts on the 2007 return so the S-Corp gets the deduction this year?

Much thanks for any help or guidance!