IRS Dishonored Check Penalty: The 2% Rule and How to Remove It
The IRS dishonored payment penalty applies when a tax payment is returned unpaid. It is 2% for payments of $1,250 or more; below that, it is the payment amount or $25, whichever is less. Electronic payments are included. A clean three-year history does not make this Section 6657 penalty eligible for First Time Abatement. The IRS instead considers a signed written explanation and supporting evidence that you paid in good faith with reasonable cause to expect the payment would be honored.
What the IRS Dishonored Check Penalty Is
The dishonored check penalty, also called the dishonored payment or bad check penalty, is charged under IRC Section 6657 when a payment to the IRS is returned unpaid by your financial institution. It is separate from failure-to-pay or failure-to-file penalties and can appear alongside them on the same notice, often a CP14.
A returned payment does not by itself establish whether relief is available. Keep the notice, bank records and the payment timeline. The IRS reviews whether the payment was made in good faith with reasonable cause to believe it would be paid; sufficient funds alone are not an automatic approval.
How Much the Dishonored Check Penalty Is
The amount depends on the size of the returned payment. For payments of $1,250 or more, the penalty is 2% of the payment amount. For payments under $1,250, the penalty is the lesser of $25 or the payment amount. So a returned $5,000 payment means a $100 penalty, a returned $400 payment means a $25 penalty, and a returned $20 payment means a $20 penalty.
Dishonored Check Penalty Calculator
Estimate the Section 6657 amount and see what records may support an IRS review. This tool does not decide eligibility or predict removal. A clean three-year filing history does not qualify this penalty for First Time Abatement. Nothing is sent or stored by this calculator.
Why You Got a Penalty Even Though You Had the Money
A payment can fail because of insufficient funds, an account hold, incorrect payment details or a processing problem. Ask the bank or payment processor what happened and save its explanation. If you reasonably expected the payment to be honored, those records can support your written request; the IRS decides whether the facts justify relief.
Follow the IRS dishonored-payment instructions: explain the facts in a signed, dated written statement, attach relevant bank or processor records, and mail it to the address on the notice. Call the notice number for account-specific help. Do not send sensitive tax or bank documents to an unverified recipient.
How to Get the Dishonored Check Penalty Removed
First Time Abatement does not apply to this Section 6657 penalty. The IRS's administrative relief policy covers specified filing, payment and deposit penalties, not every penalty on an account. For a dishonored payment, explain why it was tendered in good faith with reasonable cause to expect it would be paid, and provide supporting records.
Identify the Section 6657 charge separately from any other penalty on the notice. Use the dishonored-payment written-request procedure for this charge; a different penalty may have a different relief process. If relief reduces a penalty, the IRS generally adjusts the related penalty interest. That does not erase tax or unrelated interest.
Writing the Abatement Request
Use the address and account instructions on your actual notice. Sign and date the statement, identify the tax period and penalty, explain the payment timeline truthfully, and attach relevant bank statements or a processor letter. State why you reasonably expected payment to be honored. Keep a copy and delivery records. Do not assume a 30-to-60-day response or delay another notice deadline while waiting.
Keep the request factual and supported. A record of sufficient funds may help explain the payment, but it does not guarantee approval. Describe how you addressed the failed payment accurately. Check its actual status before sending a replacement so you do not unintentionally pay twice.
Use only facts you can support. Complete the placeholders, delete statements that do not apply, and attach relevant evidence. Follow your notice rather than assuming every notice is a CP14.
[Your name] [Your address] [Account identification required by your notice] [Date] Internal Revenue Service [Address on your actual notice] Re: Request to Reconsider Dishonored Payment Penalty (IRC Section 6657) Tax period: [period] Notice number: [number] To Whom It May Concern: Please reconsider the Section 6657 penalty relating to my payment of [$amount] initiated on [Payment initiation date]. I made the payment in good faith and reasonably expected it to be honored because [explain the true facts]. The bank or processor reported [what happened]. I enclose [identify relevant records] supporting this explanation. After learning of the return, I [accurately describe the action taken and current payment status]. Please review these facts and let me know your decision or what further information is needed. I am not requesting First Time Abatement for this Section 6657 penalty. Sincerely, [Signature] [Printed name] [Contact information]
Avoid an unsupported request: use the notice address, identify the correct penalty, sign and date the statement, and explain the facts with relevant records. Do not claim a bank error or sufficient funds unless true. Do not request First Time Abatement for Section 6657 or assume the amount calculator establishes eligibility.
Does It Apply to Electronic and EFTPS Payments?
Yes. Before July 2010, the penalty applied only to paper checks and money orders. The Homebuyer Assistance and Improvement Act of 2010 expanded IRC Section 6657 to cover any instrument of payment by any commercially acceptable means, which includes electronic funds transfers, EFTPS, debit payments, and online payments. A returned electronic payment is treated the same as a bounced paper check.
If You Owe the IRS More Than You Can Pay
A dishonored payment is sometimes a sign of wider financial issues, including a larger tax debt that is hard to pay. If so, the IRS offers payment options: an installment agreement (payment plan), an Offer in Compromise to settle for less than the full balance, or Currently Not Collectible status if you have no ability to pay right now. Penalties and daily-compounding interest keep growing until the balance is resolved, so acting sooner costs less.
Address the failed payment and the underlying balance together. Check the payment status and notice deadlines with the IRS. If you cannot pay in full, ask about a payment plan or hardship option; do not assume a penalty request pauses collection. CuraDebt can match appropriate tax-debt inquiries with independent firms whose teams include EAs, CPAs and tax attorneys. A free evaluation is not an IRS approval or a guarantee.
I've been doing this since 2001, and one thing I tell people is to choose who helps them the way they'd choose a doctor or a dentist. There are great ones, and there are ones who recommend the root canal you don't need.
With tax debt, look for real credentials, EAs, CPAs, and tax attorneys, plus a long track record, because the only way a company stays around a long time is by doing right by people. A penalty like this is usually fixable. The bigger goal is making sure the underlying balance gets handled so it stops costing you sleep.
Frequently Asked Questions
The most common questions about the IRS dishonored check and dishonored payment penalty.