When you submit a tax payment to the IRS, they expect the transaction to clear smoothly. However, if your payment is “dishonored,” meaning your bank refuses to process it, the IRS not only doesn’t receive your tax owed but also incurs administrative costs. To cover these costs and encourage timely payments, the IRS imposes a dishonored payment penalty.
Why Does the IRS Charge a Dishonored Payment Penalty?
The IRS charges this penalty because a dishonored payment complicates tax collection. Much like a bounced check to a friend creates inconvenience and possible bank fees, a dishonored tax payment creates delays and added expenses for the IRS. This penalty helps offset those costs and motivates taxpayers to ensure their payments are valid.
How the Dishonored Payment Penalty Works
If your payment is returned unpaid, the IRS will send you a notice explaining the situation and charging a penalty. This fee is generally 2% of the unpaid payment amount but can increase if the payment remains unpaid longer. The original tax amount, along with any additional penalties and interest, still remains due.
Example: If you mail a $1,000 check that bounces, the IRS might charge a $20 penalty (2% of $1,000). You would then owe the $1,000 plus the penalty until you pay in full.
Common Reasons for Dishonored Payments
- Insufficient funds in your bank account
- Closed or frozen bank accounts
- Incorrect routing or account numbers
- Stale-dated checks (over 6 months old)
- Stop payment orders placed on checks
Who Can Be Affected?
This penalty applies to anyone who sends IRS payments by check, money order, or electronic methods like Direct Debit. Taxpayers who don’t verify available funds or payment details are most at risk.
Practical Tips to Avoid Dishonored Payment Penalties
- Always verify your bank account balance before making a payment
- Double-check payment details such as account numbers and routing numbers
- Use IRS electronic payment systems, such as the Electronic Federal Tax Payment System (EFTPS), which confirm funds availability immediately
- Monitor tax deadlines and set reminders for timely payments
- Consult your bank if your account has restrictions or concerns before submitting payment
Real-Life Scenario
Sarah sent a $500 quarterly estimated tax payment by check. Her bank returned it for insufficient funds. The IRS charged a 2% penalty ($10). Sarah promptly paid the full amount plus penalty, preventing further interest accrual.
Distinguishing Dishonored Payment Penalties from Late Payment Penalties
It’s critical not to confuse the dishonored payment penalty with the late payment penalty. The latter applies when you fail to pay taxes by the due date regardless of payment method. The dishonored payment penalty specifically concerns payments rejected by your bank. If a dishonored payment causes you to miss the deadline, you might face both penalties.
What to Do if You Receive a Dishonored Payment Penalty Notice
- Pay the outstanding amount immediately to minimize additional penalties and interest
- Contact your bank to identify and resolve the reason your payment was dishonored
- Correct any errors and resend your payment promptly
- If you believe the penalty is unjustified, you can request penalty relief through penalty abatement for reasonable cause, such as a bank error or unforeseen circumstances
Key Facts at a Glance
| Aspect | Details |
|---|---|
| Penalty Rate | Generally 2% of the payment amount |
| Common Causes | Insufficient funds, closed accounts, errors |
| Affected IRS Payment Types | Checks, money orders, electronic payments |
| Potential Additional Charges | Interest and late payment penalties |
| Avoidance Tips | Verify funds and payment details; use IRS electronic systems |
Frequently Asked Questions
Q: Can I appeal a dishonored payment penalty?
Yes, taxpayers may request an appeal or penalty abatement if they can demonstrate reasonable cause, such as bank errors. See our guide on How to Get Penalty Abatement for detailed steps.
Q: Does a dishonored payment penalty impact my credit score?
No, IRS penalties themselves don’t directly affect credit scores. However, if the tax debt remains unpaid and leads to IRS liens or enforced collection actions, your credit could be indirectly affected.
Q: When is the penalty applied?
The IRS typically charges the dishonored payment penalty once your payment is returned as unpaid and after sending you a notice explaining the penalty.
Authoritative Resources
- IRS Payment Information: https://www.irs.gov/payments/payment-methods
- Consumer Financial Protection Bureau on Tax Payments: https://www.consumerfinance.gov/tax-prep/
By ensuring your tax payments clear successfully, you can avoid unnecessary fees and complications. Use electronic payment options and verify bank details to keep your tax payments smooth and on time.