IRS Dishonored Check Penalty: The 2% Rule and How to Remove It
The IRS dishonored check penalty applies when a payment you send the IRS is returned unpaid by your bank. Under IRC Section 6657, the penalty is 2% of the payment for amounts of $1,250 or more. For payments under $1,250, it is $25 or the payment amount, whichever is less. Since 2010 it covers all payment types, including electronic and EFTPS payments, not just paper checks. If the payment failed through no fault of your own, such as a bank error when you had sufficient funds, you can often get the penalty removed through First Time Penalty Abatement or a reasonable-cause request.
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.
The penalty exists to discourage payments that cannot be honored, but in practice it frequently hits people whose payments failed for reasons outside their control. The good news is that the law includes a good-faith exception, and the IRS has standard relief routes when the failure was not your fault.
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
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Why You Got a Penalty Even Though You Had the Money
A dishonored payment penalty can be assessed even when your account had sufficient funds. Common causes are bank processing glitches, direct-debit routing errors, a temporary hold on funds, or a timing issue between when the IRS presented the payment and when funds were available. If you genuinely had the money, you are usually a strong candidate to have the penalty removed.
This is one of the most common complaints about the penalty: a taxpayer files on time, sets up direct debit, has more than enough in the account, and the payment still fails. The IRS will often remove the related failure-to-pay penalty by phone, but it generally will not remove the dishonored payment penalty over the phone, you have to put the request in writing with proof. In my experience, this one catches good, careful people off guard, they did everything right and still got penalized. That is exactly the kind of penalty worth contesting.
How to Get the Dishonored Check Penalty Removed
Two main routes exist. First Time Penalty Abatement applies if you filed and paid on time for the prior three years, it can remove the penalty regardless of the reason. Reasonable cause abatement applies when the payment failed for reasons outside your control, such as a bank error, and you acted in good faith. The statute itself includes a good-faith exception: the penalty does not apply if you tendered the payment in good faith with reasonable cause to believe it would be paid.
You can often combine both arguments in one request, ask for First Time Penalty Abatement and, in the alternative, reasonable cause due to the bank or direct-debit error. You can submit the request in a written letter or on Form 843, Claim for Refund and Request for Abatement. Note that interest, unlike the penalty, is rarely waived even when the penalty is removed.
Writing the Abatement Request
Send your written request to the IRS address on your notice (usually a CP14). Include your name, address, Social Security number, the tax year, and the notice number. State that you are requesting abatement of the Section 6657 penalty under First Time Penalty Abatement and/or reasonable cause, attach a bank statement showing sufficient funds on the payment date, and note that you promptly paid the full amount once you found the problem. The IRS typically responds in 30 to 60 days.
Keep it short and factual. A clear one-page letter with the bank statement attached is usually enough, no special form is required, though Form 843 is an option. The strongest requests show two things: that you had the funds, and that you fixed the payment immediately once you realized it had failed.
Fill in the bracketed parts. Attach a bank statement showing the funds were available on the payment date.
[Your name] [Your address] [SSN or ITIN] [Date] Internal Revenue Service [Address shown on your CP14 notice] Re: Request for Abatement of Dishonored Payment Penalty (IRC Section 6657) Tax year: [year] Notice number: [CP14 or other] To Whom It May Concern: I am requesting abatement of the dishonored payment penalty assessed under IRC Section 6657 for the [year] tax year. I am requesting relief under the First Time Penalty Abatement policy and, in the alternative, for reasonable cause. My payment of [$amount] was returned by my bank, but I had sufficient funds in my account on the payment date, as shown on the enclosed bank statement. The return was caused by [bank error / direct-debit routing issue / processing error], not by insufficient funds or willful neglect. As soon as I learned of the problem, I paid the full amount on 2026. I respectfully request that the Section 6657 penalty be removed and any related amount refunded. Enclosed is my bank statement showing the available balance. Sincerely, [Signature] [Printed name] [Phone]
What gets an abatement denied: A few avoidable mistakes sink otherwise valid requests: sending the letter to the wrong IRS address (use the one on your notice, not a general address), not attaching a bank statement that clearly shows the funds on the payment date, waiting so long that the payment looks like neglect rather than an error, and asking only for reasonable cause when you also qualify for First Time Penalty Abatement. Always request both in the same letter so the IRS can grant whichever applies.
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.
The practical order is usually: deal with the dishonored payment first (pay it or request abatement), then address the underlying balance with the resolution that fits your income and assets. Independent tax-resolution firms whose teams include EAs, CPAs, and tax attorneys handle exactly these situations, and a free consultation can map out which option applies before the debt grows.
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.
