What Happens If My IRS Payment Bounced?
Learn what happens if your IRS payment bounces, including potential fees, how to resolve the issue, and the impact on your tax account.
If your IRS payment bounces due to insufficient funds or another issue, you may face penalties and additional charges. The IRS still expects the amount owed to be paid, and failing to resolve it can lead to further financial consequences. Understanding what happens next and how to fix the situation quickly is key to avoiding extra costs or potential collection actions.
IRS Notification
When a payment fails, the IRS sends Notice CP205, explaining the issue and the remaining balance. This letter details the failed transaction, account adjustments, and instructions for resolving the matter. If the payment was made through direct debit, the IRS may attempt to process it again before issuing a notice.
The timing of this notification depends on the payment method. For electronic payments through Direct Pay or the Electronic Federal Tax Payment System (EFTPS), the IRS usually detects the issue within a few business days. Payments by check take longer since the IRS must wait for the bank to return the check before sending a notice.
In some cases, the IRS may notify your bank, particularly if the payment failed due to a closed account or incorrect banking details. Multiple failed payments may lead to increased scrutiny and restrictions on future payment methods.
Penalties and Fees
A returned IRS payment can result in penalties, late fees, and accumulating interest. The total cost depends on how quickly the issue is resolved and whether prior penalties have been assessed.
Non-Sufficient Funds Penalty
Under Internal Revenue Code 6657, the IRS imposes a penalty for bounced payments. The fee is $25 or 2% of the payment amount, whichever is lower.
– If a payment of $800 fails, the penalty is $16 (2% of $800).
– If a payment of $100 fails, the penalty is $25, since that is the minimum charge.
This penalty applies to payments made by check, electronic funds transfer, or other methods that fail due to insufficient funds. If the issue was caused by a bank error, the IRS may waive the penalty if proper documentation is provided. Repeated failed payments can lead to increased scrutiny and restrictions on payment options.
Late Payment Fees
If the bounced payment results in an unpaid tax balance past the due date, the IRS may assess a Failure to Pay Penalty under Internal Revenue Code 6651(a)(2). This penalty is 0.5% of the unpaid tax per month, up to 25% of the total amount due.
– If a taxpayer owes $2,000 and the payment fails, the penalty is $10 per month (0.5% of $2,000) until the balance is paid or the maximum penalty is reached.
If the IRS has issued a Notice of Intent to Levy (Letter 1058 or LT11) and the balance remains unpaid for 10 days, the penalty increases to 1% per month. Taxpayers in an approved payment plan may qualify for a reduced penalty rate of 0.25% per month.
Interest Accrual
Interest is charged on unpaid tax balances under Internal Revenue Code 6601. The rate is determined quarterly and is based on the federal short-term rate plus 3%. As of Q2 2024, the interest rate for individuals is 8% per year, compounded daily.
– If a taxpayer owes $5,000, the daily interest charge is about $1.10 per day ($5,000 × 8% ÷ 365).
– Over a month, this adds approximately $33 in interest.
Unlike penalties, interest cannot be waived except in rare cases where the IRS made an error. Even if a taxpayer qualifies for penalty relief, interest continues to accrue until the balance is fully paid.
Correcting the Payment
Resolving a bounced IRS payment starts with identifying the cause. If the issue was a banking error—such as incorrect account details or a temporary hold—contacting your bank can clarify whether the payment can be reprocessed. If the funds were insufficient at the time but are now available, making a new payment immediately can prevent further complications.
The fastest way to submit a replacement payment is through IRS Direct Pay for individuals or EFTPS for businesses. Both allow direct bank payments without fees. Using a debit or credit card is an option, but third-party processors charge a service fee. Mailing a check or money order is also possible but takes longer to process.
If the failed payment was part of an installment agreement, the IRS may attempt to withdraw the amount again in the next scheduled cycle. To avoid defaulting, taxpayers should submit the missed payment or contact the IRS to discuss adjustments. Waiting too long can result in the cancellation of the agreement.
Possible Impacts on Refund
A failed IRS payment can affect a taxpayer’s refund if the outstanding balance remains unpaid. The IRS may apply the Treasury Offset Program (TOP) to seize future refunds to cover the debt. This allows federal agencies to intercept refunds for unpaid taxes, child support, student loans, or other government debts.
If a taxpayer corrects the bounced payment before the IRS processes their return, the refund should be issued as expected. However, if the debt remains, the refund may be reduced or fully absorbed. The IRS typically sends a Notice of Offset (CP49) explaining how the refund was applied, but taxpayers may not receive this notice before seeing the adjustment in their bank account.
Consequences of Unresolved Balances
If a bounced IRS payment is not corrected, the situation can escalate. The IRS has broad authority to enforce collection actions, which become more aggressive as the debt remains unpaid.
One immediate consequence is a Notice of Federal Tax Lien (NFTL), which publicly records the government’s legal claim against a taxpayer’s property. This can impact creditworthiness and make it harder to secure loans or sell assets. If the debt remains unresolved, the IRS may issue a levy, allowing them to seize wages, bank accounts, or other assets.
In extreme cases, the IRS can garnish Social Security benefits or place restrictions on passport renewals under Internal Revenue Code 7345, affecting international travel.