What Are the Penalties for a Dishonored Check?

A dishonored check, often called a bounced check, occurs when a financial institution refuses to pay its specified amount. This can happen due to insufficient funds (NSF) in the payer’s account or if the account has been closed. This event triggers financial consequences for the person who wrote it. Penalties can be imposed by banks, the recipient of the check, and government agencies under specific circumstances.

Sources of Dishonored Check Fees

When a check is returned unpaid, the financial institutions involved are the first to impose fees. The check writer’s bank will charge a non-sufficient funds (NSF) fee for failing to have enough money in the account to cover the payment. These fees are outlined in the account holder’s agreement and generally range from $10 to $40.

Consequences also extend to the person or business that attempted to deposit the check. Their bank may charge a “deposited item returned fee” for handling a transaction that failed. This fee, which can be similar in amount to an NSF fee, compensates the bank for the administrative work of processing the bad check.

Beyond bank charges, the recipient of the dishonored check is often legally permitted to charge a separate penalty to the check writer. This penalty is intended to compensate the recipient for the inconvenience and any costs they incurred, such as their own bank’s returned item fee. These penalties are governed by legal frameworks that dictate how much can be charged.

State Law Limitations on Penalties

The penalties that a merchant or individual can charge for a bounced check are regulated by state laws, which establish clear limits on the amounts. The structure of these penalties varies significantly across the country. It is a common requirement for businesses to post their check acceptance policy, including any fees for returned checks, in a visible location for customers.

Many states authorize a fixed flat fee, which falls in the range of $25 to $40 per dishonored check. Some jurisdictions use a different model, allowing the recipient to charge a fee based on a percentage of the check’s value. This method scales the penalty with the size of the transaction.

A penalty structure adopted by several states involves “treble damages.” Under these statutes, a recipient may be entitled to collect up to three times the face value of the check. These laws often include a minimum and maximum cap on the total penalty. For instance, the damages might be set at three times the check’s amount but no less than $100 and no more than $1,500.

The IRS Penalty for a Dishonored Payment

When a payment made to the Internal Revenue Service (IRS) for taxes is dishonored, it triggers a specific federal penalty. This rule applies to any form of payment, including money orders and electronic payments, that is not honored by a financial institution. This penalty is established under the Internal Revenue Code and enforced by the IRS.

The penalty calculation depends on the amount of the payment. For a payment of $1,250 or more, the penalty is 2% of its face value. If the payment is for an amount less than $1,250, the penalty is the lesser of $25 or the actual amount of the payment.

It is possible to have this penalty waived if the taxpayer can demonstrate that the payment was tendered in good faith. To qualify for abatement, the taxpayer must show they had “reasonable cause” to believe the funds would be available when the payment was made. This accounts for bank errors or unforeseen circumstances.

Procedure for Demanding Payment

When a recipient wants to collect the original amount of a dishonored check plus any legally allowed penalties, the first step is to send a formal written notice to the check writer. This document is often referred to as a “demand letter” or “notice of dishonor.” It formally notifies the individual that their check was returned and demands full payment within a specified timeframe.

The demand letter must contain specific information to be legally effective. It should state the details of the check, including the date, check number, and original amount. The letter must also specify the penalty being charged, which must conform to state law, and provide a clear deadline for payment.

To ensure legal proof of notification, many state laws require the demand letter to be sent via certified mail with a return receipt requested. This creates a verifiable record that the notice was sent and received, which is important if legal action becomes necessary. If the check writer ignores the demand and fails to pay, the recipient’s next course of action is to file a lawsuit in small claims court.