If your IRS payment is returned, the agency treats your tax bill as never paid and starts stacking costs on top of it: a dishonored-payment penalty for the failed transaction, a failure-to-pay penalty that runs from the original return due date, and interest that compounds daily on everything you owe. Getting a successful payment through quickly is what stops the meter.
Why Payments Get Returned
Most returns trace back to the banking side. Insufficient funds is the single most common cause: the account did not have enough money when the IRS or its processor tried to pull the payment. Electronic payments through IRS Direct Pay or the Electronic Federal Tax Payment System often fail because of a typo in the routing or account number, since the Automated Clearing House network rejects a transaction it cannot match to a real account. Payments drawn on a closed account, or one with a stop-payment order in place, get returned for the same basic reason: the bank will not honor them.
Which cause applies matters, because it shapes both how you fix the underlying problem and whether you have grounds to ask for the penalty to be waived.
The Dishonored Payment Penalty
The IRS assesses what it formally calls the Dishonored Check or Other Form of Payment Penalty whenever a payment fails, whether it was a paper check, an electronic bank transfer, or a money order. It applies regardless of why the payment bounced.1Internal Revenue Service. Dishonored Check or Other Form of Payment Penalty
The amount depends on the size of the payment:
- For payments of $1,250 or more, the penalty is 2% of the payment. A $5,000 returned payment triggers a $100 penalty.
- For payments under $1,250, the penalty is $25 or the payment amount, whichever is less. A $15 returned payment carries a $15 penalty; a $500 returned payment carries the full $25.2Office of the Law Revision Counsel. 26 USC 6657 – Bad Checks
Failure-to-Pay Penalty and Interest Keep Running
The dishonored-payment charge is only the start. Because a returned payment means the tax was never actually paid, the IRS also charges a failure-to-pay penalty from the original due date of your return, not the date the payment bounced. That penalty accrues at 0.5% of your unpaid tax for each month or partial month the balance remains outstanding, up to a maximum of 25%.3Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax
Interest is charged on the unpaid tax and on any outstanding penalties. It compounds daily and does not stop until you pay everything in full, penalties included.4Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges The rate resets each quarter, set at the federal short-term rate plus three percentage points.5Office of the Law Revision Counsel. 26 USC 6621 – Determination of Rate of Interest
Here is the part that surprises people. If your return was due April 15 and your payment bounced in late April, the failure-to-pay penalty has been running since April 15. You are penalized for the whole period, not just from the day the bank rejected the transaction.
The Notices You’ll Receive
The IRS sends Notice CP165 first. It tells you the bank did not honor the payment and details the penalty assessed.6Internal Revenue Service. Understanding Your CP165 Notice
If you do not resolve the balance, the IRS escalates through its standard collection sequence. A CP161 follows, reminding you of the unpaid balance.7Internal Revenue Service. Understanding Your CP161 Notice After that comes a CP504, a formal Notice of Intent to Levy. At that point the IRS can seize bank accounts, wages, and state tax refunds to collect what you owe.8Internal Revenue Service. Understanding Your CP504 Notice
Every notice carries a response deadline printed on the letter. The IRS measures your response time from the printed date, not the day the letter arrives, so treat each one as urgent.
How to Resubmit the Payment
Fix the cause before you send money again. If a typo caused the return, verify your routing and account numbers character by character. If the account was empty, confirm the full amount is available and will stay available for several business days while the transaction clears.
Your resubmission has to cover everything: the original tax, the dishonored-payment penalty, the failure-to-pay penalty that has accrued, and interest to date. The balance on your most recent notice reflects those amounts, though additional interest may have accrued since it printed.
IRS Direct Pay is the fastest free option. It pulls funds directly from a checking or savings account and gives you immediate confirmation.9Internal Revenue Service. Direct Pay with Bank Account You can also reach Direct Pay through the IRS2Go mobile app.10Internal Revenue Service. IRS2Go Mobile App EFTPS is another electronic option but requires enrollment in advance. Credit and debit card payments work but carry processor fees.
If you go with paper, send a cashier’s check or money order by certified mail so you have proof of the mailing date. Reference the correct tax year, form type (1040, 941, and so on), and your Social Security or Employer Identification Number. A vague payment can be misapplied while your original balance keeps accruing penalties.
A second returned payment is much worse than the first. It doubles the dishonored-payment charges and sharply raises the odds of enforced collection. Use a funding source you’re confident in.
If You Can’t Pay It All Right Now
Ignoring the balance is the worst move: penalties and interest keep running, and enforced collection follows. The IRS offers structured options instead. A short-term plan gives you up to 180 days to pay in full. A long-term installment agreement lets you pay monthly, either by direct debit or by payments you initiate yourself, with setup fees that vary by application method and income level.11Internal Revenue Service. Payment Plans, Installment Agreements
To apply online, individuals must owe $50,000 or less in combined tax, penalties, and interest for a long-term plan, or under $100,000 for a short-term plan. Above those thresholds, you can still request a plan by phone or by submitting Form 9465. One protection worth knowing: while a payment plan request is pending, the IRS generally cannot levy your assets.11Internal Revenue Service. Payment Plans, Installment Agreements
If the Bounced Payment Was Part of an Installment Agreement
A returned payment on an existing IRS plan can be treated as a default. You’ll receive Notice CP523, which warns that the IRS intends to terminate the agreement and begin levy action.12Internal Revenue Service. Understanding Your CP523 Notice
You have 30 days from the date on the CP523 to contact the IRS and fix the problem. Miss that window, and the IRS terminates the agreement and can file a federal tax lien or levy your wages and bank accounts. For taxpayers with seriously delinquent tax debt, the IRS can also ask the State Department to deny or revoke a passport under the FAST Act.12Internal Revenue Service. Understanding Your CP523 Notice
Reinstatement is not automatic. The IRS may charge a reinstatement fee, and you may need to pay any new tax liability in full before the plan can resume. Call the number on the CP523 right away, and if you have already made the missed payment, say so, so the account can be updated.
Getting the Penalty Removed
Two paths can reduce or remove the penalties. Which one fits depends on the penalty type and your circumstances.
First Time Abate Waiver
The First Time Abate waiver can eliminate the failure-to-pay penalty if you have a clean compliance record for the three tax years before the penalty year. That means all required returns filed on time and no penalties during that period, or any prior penalty removed for a reason other than First Time Abate.13Internal Revenue Service. Administrative Penalty Relief Request it by calling the number on your penalty notice. You need to be current on all filing and payment obligations when you ask. This waiver generally applies to the failure-to-pay penalty, not the dishonored-payment penalty.
Reasonable Cause for the Dishonored Payment Penalty
The dishonored-payment penalty has its own statutory exception: it does not apply if you tendered the payment “in good faith and with reasonable cause to believe that it would be duly paid.”2Office of the Law Revision Counsel. 26 USC 6657 – Bad Checks Bank errors are where this works in your favor. A processing mistake, an account merged without notice, or a transfer the bank failed to execute in time can qualify.
The IRS lists the dishonored-payment penalty as eligible for penalty relief and directs taxpayers to follow the instructions on the notice they received.14Internal Revenue Service. Penalty Relief Straightforward cases can sometimes be resolved by phone. Otherwise, file Form 843 with a written explanation and supporting documentation, such as a letter from your bank confirming the error or statements showing the funds were available when you submitted the payment.15Internal Revenue Service. About Form 843, Claim for Refund and Request for Abatement
What will not work is simply being short on cash. The IRS draws a hard line between circumstances beyond your control and ordinary financial shortfalls. A documented bank error is strong. A surprise medical emergency that drained the account might qualify. Not having the money does not.
If the IRS grants relief, it removes or reduces the penalty and refunds any portion you have already paid. The underlying tax and interest, however, are almost never abated. Interest keeps running on unpaid tax regardless of penalty relief, and the IRS does not waive interest charges in most circumstances.4Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges