Quick summary

When your tax payment is returned (bounced), the IRS treats the underlying tax as unpaid. That can lead to a notice, assessed interest, and failure-to-pay penalties if you don’t correct the situation promptly. Typical causes include insufficient funds, closed or changed bank accounts, or wrong routing/account numbers. Acting immediately—confirming what happened, repaying with a reliable method, and documenting your steps—limits financial and collection consequences (IRS guidance: see “Understanding your IRS notice or letter” and payment options) (IRS).

How returned tax payments happen

  • Electronic Federal Tax Payment System (EFTPS) or Direct Pay debit attempted but the bank returned the transaction for NSF or a closed account.
  • A mailed check was returned by your bank as nonsufficient funds or the check was never honored.
  • You entered the wrong bank routing or account number for an ACH debit or direct deposit.

In practice, the taxpayer often finds out via an IRS notice or by seeing a bank chargeback or NSF fee on their statement. The IRS will generally send a letter or notice stating the payment was not processed and what tax period it applies to; keep that notice for your records (IRS, Understanding your IRS notice or letter).

What the IRS can do next (what to expect)

  • Sends a notice explaining the payment failure and the balance due. The notice will include instructions and a deadline to respond.
  • Assesses interest on the unpaid balance from the original due date; interest is compounded and the rate changes quarterly (see IRS interest rates page).
  • Assesses failure-to-pay penalties if the balance remains unpaid. The failure-to-pay penalty is generally 0.5% of the unpaid tax per month (up to a statutory limit) — the best relief is to bring the account current quickly or request penalty relief if eligible (IRS penalty information).
  • Begins standard collection activity if left unpaid for an extended period, which can include liens or levies in serious cases.

Note: your bank may charge an NSF or returned-check fee. The IRS treats a returned payment as if you never paid; bank fees and IRS interest/penalties are separate.

First steps to take — a practical checklist (what I do for clients)

  1. Pause and gather facts
  • Locate the IRS notice (if received) and note the notice number, amount, and tax period. If you haven’t received a notice, check your bank statements for a returned-debit entry or NSF charge.
  • Verify account details you provided: routing number, account number, and whether the account was open when the IRS attempted the debit.
  1. Contact your bank
  • Confirm whether the payment was returned, the reason code, and whether the bank charged an NSF fee. Request written confirmation (screenshot or bank letter) if possible — this helps if you later request penalty relief.
  1. Contact the IRS
  • Call the number on the notice or use the main IRS payment line. Be ready with your SSN or EIN, tax year, notice number, and bank info. Keep a record of the date, time, and representative you spoke with.
  1. Re-submit payment promptly using a reliable method
  • Recommended options: IRS Direct Pay (no fee) for individuals, or EFTPS for businesses/scheduled electronic payments. Both reduce the risk of errors when entered correctly.
  • If you choose a credit or debit card, a third-party processor will charge a processing fee. Paying by check or money order works too, but allow mail time and trace your payment.
  1. Consider short-term fixes
  • If you can’t pay the full balance immediately, set up an installment agreement with the IRS as soon as possible. That stops additional collection enforcement if you comply with the agreement (see our guide on how to set up an IRS payment plan and IRS payment plan options).
  1. Request penalty relief when appropriate
  • If the returned payment was due to circumstances beyond your control (sudden bank error, identity theft, or reasonable cause), you may qualify for penalty abatement or first-time penalty relief. Document everything.

Payment methods and pros/cons

  • IRS Direct Pay (individuals): free, quick, and simple. Use for one-time payments. (IRS Direct Pay)
  • EFTPS (businesses and individuals who enroll): free, reliable for scheduled payments and large-dollar transfers. Enrollment required. (EFTPS)
  • Credit/Debit cards: immediate, but third-party fees apply and cards may be treated as cash advances by your issuer.
  • Check or money order by mail: no third-party fee, but slower and susceptible to mail delays or bank returns.

In my practice I recommend Direct Pay or EFTPS for most repeat or large payments because those channels provide immediate confirmation and lower risk of an administrative return.

If you can’t pay the balance immediately

  • Installment agreement: Apply online or by phone to set up a monthly payment plan. If approved and you keep current, the IRS generally won’t take enforced collection action while the plan is in good standing (see our practical walkthrough: How to set up an IRS payment plan and IRS Payment Plan Options).
  • Offer in Compromise: For taxpayers with limited ability to pay, this lets you settle for less than the full balance, but it has strict eligibility rules and documentation requirements (IRS Offer in Compromise).
  • Temporarily delay collection: If you can show that paying would cause immediate financial hardship, you can request the IRS place your account in “currently not collectible” status — collections are paused but interest and penalties continue to accrue.

How to request penalty abatement or relief

If penalties were assessed because of a returned payment, you can request abatement if you have reasonable cause or if you qualify for the IRS’s First-Time Penalty Abatement (FTA). Typical supporting documentation includes bank statements showing a bank error, sudden illness, death in the family, or other evidence of circumstances beyond your control. In my experience, well-documented requests have a significantly higher chance of success.

Useful IRS resources:

  • Penalty relief and first-time abatement details (IRS penalty relief pages)
  • Understanding notices and how to respond (IRS: Understanding your IRS notice or letter)

Documentation and record-keeping — what to keep

  • A copy/photo of the IRS notice
  • Bank statements showing returned items or NSF fees
  • Written confirmation from your bank about why the payment was returned
  • Records of phone calls/emails with the IRS (date, time, agent name, summary)
  • Copies of any new payments (screenshots or confirmation numbers)

These documents are critical if you later dispute penalties or need to show reasonable cause.

Common mistakes to avoid

  • Waiting to act: Delay increases interest and penalties and may allow collection actions to progress.
  • Repeatedly re-trying the same broken payment method: Use a different verified account or method to avoid repeated returns.
  • Not documenting the timeline: Without records, penalty abatement requests are harder to win.

Real-world examples (anonymized)

1) A taxpayer paid using an old checking account the IRS still had on file. The bank flagged the debit as closed and returned it. We immediately called the IRS, provided the bank’s written confirmation, resubmitted the payment via Direct Pay, and requested penalty abatement. The IRS removed the penalty based on reasonable cause evidence.

2) A small business missed a quarterly estimated tax debit because the owner mis-keyed the account number for EFTPS. We corrected the EFTPS account, paid the balance with a same-day bank transfer, and set calendar reminders and dual verification for future payments.

Costs you should expect

  • Bank NSF or returned-check fees (varies by bank)
  • Interest on unpaid tax from the original due date (IRS-determined rate, compounded daily)
  • Failure-to-pay penalties while the balance remains unpaid. Prompt repayment or a payment plan minimizes these charges.

When to get professional help

Call a tax pro if: the amount is large, you’re near a collections threshold, you received multiple notices, or you want help preparing a penalty abatement request. A CPA or enrolled agent can communicate with the IRS on your behalf and help you file for relief.

Authoritative sources: IRS pages on payment options, notices, penalties and interest (see https://www.irs.gov/payments and https://www.irs.gov/individuals/understanding-your-irs-notice-or-letter).

Professional disclaimer

This article is educational and does not constitute personalized tax or legal advice. For guidance specific to your situation, consult a licensed tax professional, CPA, or attorney.

About the author

I’m a CPA and CFP® with over 15 years helping clients navigate tax notices, returned payments, and IRS collection issues. In my practice I focus on rapid remediation, accurate documentation, and negotiating practical payment arrangements to limit total cost and stress.