TC 681: Dishonored Designated Payment of Interest

What the code actually does

IRS Document 6209, Section 8A defines TC 681 as reversing "a dishonored check submitted as a designated payment of interest," reducing the TC 680 transaction "in whole or in part." As with every dishonored-payment code in this batch, "if not accompanied by a secondary TC 280, a TC 286 is systemically generated."

Because TC 680 is a designated payment that updates the interest-paid field on the module (the IRS's record for one tax period within the account) directly, its reversal is not a routine payment unwind — it has to unwind the specific interest-accounting effect the original payment produced, not merely subtract the dollar amount from the module's running balance.

Why the interest math needs a second look

Recall from the TC 680 page that an over-designated interest payment can generate a TC 196 assessment for the excess, and can spill over to pay down tax and penalty. When the underlying check bounces, that entire cascade rested on money that never actually arrived — the TC 196 and any tax/penalty application it triggered may need to be reversed or recalculated, not just the headline TC 680 amount.

This is a case where pulling the full transaction history, not just the current balance, is necessary. A module showing a TC 680 followed by a TC 196 followed by a TC 681 tells a materially different story than a TC 680 and TC 681 alone with no intervening cascade.

The restricted-interest wrinkle carries over

The same restricted-interest caveat that applies to the correction code TC 682 is worth checking here too: on a module where interest is restricted (TC 340/TC 341), the automatic cleanup logic the system otherwise relies on does not run the same way, which means a manual review of the interest computation is more likely to be necessary following a TC 681 reversal.

Confirm this before closing out the case — IRM 21.5.7.3.2 recommends the standard account-wide research, CC (Command Code) TXMOD and CC IMFOL/BMFOL, to trace every transaction the original TC 680 touched before assuming a simple reversal fully restored the account to its pre-payment state.

What TC 681 gets confused with

It gets confused with a routine payment reversal. Because the original payment was specifically designated and updated the interest-paid field, its reversal can carry follow-on effects an ordinary payment reversal does not.

It gets confused with an interest dispute or abatement request. TC 681 reflects a returned check under IRC §6657, not a determination that the underlying interest was wrong.

It gets confused with the plain designated-payment code for penalty, TC 690, which reverses under its own dedicated dishonored-check code, TC 691, rather than this one.

It also gets confused with TC 694's correction code, TC 695 — a different animal entirely. Doc 6209's entry for TC 695 carries no dishonored-check language at all ("Reverses TC 694 in whole or part"), unlike TC 681 and TC 691, so a TC 695 should not be assumed to reflect a bounced payment.

The practitioner's actual next step

Trace the full transaction sequence from the original TC 680 forward, including any TC 196 the overpayment cascade generated, before assuming the reversal is complete.

Check for restricted interest (TC 340/341) on the module, since it changes whether the interest recomputation happens automatically.

Address the resulting TC 286 bad-check penalty on its own reasonable-cause terms.

Recompute the actual interest still owed once the bounced payment is backed out, rather than assuming the pre-TC 680 balance simply reappears unchanged.