CP165 Notice: Your Payment Bounced and the IRS Charged a Penalty

What CP165 means

The IRS page for this notice says: “We sent you this notice because your bank didn’t honor your payment.” It adds that the IRS charged you a bad check penalty as a result. The page describes a dishonored payment as one that could not clear because the account did not hold enough money.

The penalty sits on top of the tax you tried to pay. The IRS page on this penalty says your bank “declares the amount unpaid,” so the tax, the penalty and any interest all remain due. The notice explains your due date, amount due and payment options.

How the law sets the penalty

IRC 6657 sets the amount. For a payment of $1,250 or more, the penalty equals 2 percent of the payment (IRC 6657). For a payment under $1,250, the penalty is $25 or the amount of the payment, whichever is less (IRC 6657).

So a returned $1,000 payment costs $25, a returned $20 payment costs $20, and a returned $5,000 payment costs $100. The IRS penalty page prints the same two tiers.

The law does not stop at paper checks. It covers any payment “by any commercially acceptable means” that your bank does not pay (IRC 6657). The IRS penalty page names a bad check or an electronic payment.

When the penalty does not apply

The last sentence of IRC 6657 holds the way out. The penalty does not apply if you made the payment “in good faith and with reasonable cause to believe” your bank would pay it. In plain words, no penalty applies if you paid honestly and had good reason to think the money was there. For how the IRS thinks about reasonable cause in general, see what counts as reasonable cause.

To ask the IRS to remove the penalty, its penalty page says to send a signed and dated written statement that explains why, with documents that show the account held enough money, such as a bank statement or a letter from your bank. Mail it to the address on your notice.

If your bank returned the payment by mistake, the same page says to send a letter that explains why the IRS should not charge the penalty, with a payment for only the tax you owe.

What people mistake CP165 for

Some people read CP165 as a bill for the penalty alone. It is not: your bank declared the payment unpaid, so the tax stays due too. Others think a new payment closes the matter. A new payment covers the tax, but the penalty stays on the account until you pay it or the IRS removes it.

And some assume only paper checks trigger the penalty. The law covers any payment method your bank refuses to honor (IRC 6657).

For practitioners: what to check first

Check the bank’s return reason before anything else. The good-faith exception in IRC 6657 turns on good faith and “reasonable cause to believe” the payment would clear, so ask for the bank’s letter or statement first. If the bank returned the payment in error, the IRS penalty page has its own dispute route: a letter plus payment of only the tax owed.

Then check the math against the payment amount, not the balance due: the statute bases the penalty on “the amount of such instrument” (IRC 6657). Last, pay the underlying tax promptly by a method that will clear, because interest runs on the unpaid amount after the notice due date. To estimate interest and late-payment penalties on the unpaid tax, use the penalty and interest calculator.

Common Questions