What Is the IRS Dishonored Payment Penalty?

The IRS imposes a dishonored payment penalty when a payment made to them is not processed by the taxpayer’s financial institution. This can occur with various payment methods, including traditional paper checks and modern electronic payments. The most common reasons for a payment to be dishonored are insufficient funds in the account or the use of a closed account for the transaction.

Calculating the Penalty

The calculation for the dishonored payment penalty, governed by Internal Revenue Code Section 6657, depends on the amount of the payment. For any payment of $1,250 or more, the penalty is 2% of the payment’s value. For instance, if a tax payment of $5,000 is dishonored, the resulting penalty would be $100. There is no maximum limit on this penalty.

A different rule applies to payments under $1,250. In these cases, the penalty is the lesser of two amounts: $25 or the full amount of the payment itself. For example, if a dishonored payment was for $500, the penalty would be $25. If the payment was for only $15, the penalty would be $15, as that is less than the $25 threshold.

Resolving the Penalty

Upon receiving a notice, such as Letter 608C, informing you of a dishonored payment, you must settle the underlying tax debt. The IRS will not resubmit the original payment, so you must initiate a new transaction. This new payment must also cover the dishonored payment penalty and any interest that has accrued on the unpaid tax.

To make the replacement payment, taxpayers can use several approved methods:

• IRS Direct Pay, which allows for direct debit from a bank account
• Payment via a debit or credit card through an authorized processor
• A new paper check mailed to the address specified on the IRS notice
• A money order mailed to the address specified on the IRS notice

Promptly making this full payment helps prevent the accumulation of further interest and other potential penalties, like the failure-to-pay penalty.

Requesting Penalty Removal

It is possible to ask the IRS to remove, or abate, the dishonored payment penalty if there was a valid reason for the payment failure. The standard for removal is “reasonable cause,” which means the taxpayer must demonstrate they acted in good faith and with ordinary business care and prudence, believing the payment would be honored. Examples of reasonable cause can include a verifiable bank error, a natural disaster, or a sudden serious illness.

To request abatement, you can call the phone number on the IRS notice or send a formal written statement to the address provided. The written request should be signed and dated and include:

• Your name and Taxpayer Identification Number (TIN)
• The notice number, such as Letter 608C
• The tax period in question
• A detailed explanation of the circumstances that constitute reasonable cause

Attaching supporting documents, such as a letter from the bank confirming an error or bank statements showing sufficient funds were available, can strengthen the request.