Avoid Penalties
Navigating the IRS Dishonored Payment Penalty

What is the IRS Dishonored Payment Penalty?

The IRS imposes a dishonored payment penalty when your payment, whether electronic or via check, fails to process. This typically happens due to insufficient funds in your account or the use of a closed account.

This penalty, governed by Internal Revenue Code Section 6657, can add significant costs to your tax bill if not addressed promptly. Understanding the ins and outs can save you money and stress.

How Calculating the Dishonored Payment Penalty

The penalty calculation hinges on the payment amount. For payments of $1,250 or more, the penalty is 2% of the payment. For example, a dishonored $5,000 payment incurs a $100 penalty.

For payments under $1,250, the penalty is the *lesser* of $25 or the full payment amount. If your dishonored payment was $500, the penalty is $25. If it was $15, the penalty is $15.

Resolve Resolving the Dishonored Payment and Avoiding Further Penalties

Upon receiving notice (like Letter 608C), you *must* pay your original tax debt and the penalty. The IRS *won't* reprocess your initial payment.

You can pay via: IRS Direct Pay, debit/credit card through an authorized processor, a new check, or a money order. Paying promptly prevents further interest and penalties.

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Prompt action is crucial to resolve a dishonored payment. Waiting only increases the financial burden.

AccountingInsights Team

Relief Requesting Penalty Removal: Reasonable Cause

You can request penalty abatement if a valid reason caused the payment failure. 'Reasonable cause' means you acted in good faith and with ordinary business care.

Examples: verifiable bank error, natural disaster, or sudden illness. Submit a signed, dated written request with your name, TIN, notice number, tax period, and a detailed explanation. Include supporting documents (bank letter or statements).