Dishonored Check Tax Penalty Explained

You will be assessed a tax penalty if the check you send to the Internal Revenue Service cannot be cashed. The most common reason for this failure is insufficient funds in your bank account. This is called a "dishonored check," and the penalty code on the receipt the IRS sends you will reflect this term. To address the problem, you can either pay the penalty or request a removal of the penalty. 

Notice of Penalty

You will receive by mail a stub with the notice of your penalty. The stub will have a receipt to return with your payment. On this receipt, there will be a code telling you the reason for the penalty and request for payment. This code is small and can be hard to find; it is located directly above the return address on the stub. The penalty code assessed against you will be a two digit number. The code for a dishonored check is typically 03. This indicates the reason for the penalty is the fact your check was rejected. As a result, you must pay the IRS again, and you must also pay the penalty according to the code. 

Determining Size of Penalty

The size of your penalty falls into one of two categories. If your payment was over $1,250, you will owe a 2 percent penalty on the check. This can amount to a very large payment for some individuals in a higher tax bracket. There is no adjustment of this percentage. It is a flat fee penalty taken against all dishonored checks for individuals making this large of a payment. Those who wrote checks under the $1,250 threshold will receive some relief, on the other hand. They will owe either the amount on the check or $25, whichever is less. This means most of these individuals will owe the simple $25 fee. 

Removal of Penalty

You can file for a removal of the penalty if you feel it was improperly assessed against you. In the case of a dishonored check, you will have difficulty arguing, however. The most common cause for removal is improper advice from the IRS. You can prove this if you sent in a written request for advice, received and followed the advice and were then penalized. In this instance, you would send in proof of the advice given and followed to the IRS directly.

Unfortunately, this does not likely apply to a dishonored check penalty. Therefore, you would have to argue some other reasonable cause for the removal. If your bank erred, you may ask your bank to provide a statement as such in order to argue the penalty should be removed. This could occur if the bank unnecessarily rejected the check, closed your account or otherwise acted without your consent and without cause. Simply send in a signed statement, and the IRS will notify you if it accepts your reason for asking for removal of the penalty. Not having sufficient funds is not a good reason. In this case, you should have filed for a payment plan.