IRS Providing Relief From Bad Check Penalty

24 August 2020

IRS website – IRS Operations During COVID-19: Mission critical functions continue (updated August 13, 2020)

In an update to its mission-critical website, the IRS has provided information regarding the effects of its COVID-19-related delay in opening mail that it received. Included in this information is the fact that, due to delays in IRS processing, IRS is providing relief from bad check penalties for dishonored checks the agency received between March 1 and July 15.

Background. Due to the COVID-19 pandemic, in March 2020 the IRS suspended or extremely limited many of its live services, including telephone assistance, processing paper tax returns, and responding to correspondence.

When a check or other commercial payment instrument the IRS receives for payment of taxes doesn’t clear the bank, a penalty of 2% of the amount of the check or other commercial payment instrument generally applies. However, if the amount of the check or other commercial payment instrument is less than $1,250, the penalty is $25 or the amount of the check or other commercial payment instrument, whichever is less. (Code Sec. 6657) This penalty is commonly referred to as the bad check penalty or the dishonored payment penalty.

Bad check penalty relief. The IRS says that if a taxpayer mailed a check (either with or without a tax return), it may still be unopened in the backlog of mail the IRS is processing due to COVID-19. Any payments will be posted as of the date the IRS received them rather than the date the IRS processed them.

To avoid penalties and interest, taxpayers should not cancel their checks and should ensure funds continue to be available so the IRS can process them.

To provide fair and equitable treatment, the IRS is providing relief from bad check penalties for dishonored checks the agency received between March 1 and July 15 due to delays in this IRS processing. However, interest and other penalties may still apply.

Illustration. Suppose a taxpayer sent in a check, and the IRS received it on March 2 for a tax that was due on January 15. The IRS did not process the check until August 20, at which time the check did not clear. The IRS will impose interest and penalties for a late payment calculated to the March 2 receipt date. But it will not tack on a bad check penalty.