What happens when taxpayers bounce a check off IRS?

Journal Record, The (Oklahoma City), May 19, 1998 by Ingrid Eisenstadter N.Y. Times News Service

There is dumb. There is dumber. And then there is bouncing a check off the Internal Revenue Service.

A month after the income tax filing deadline, many people are waiting for their refund checks. But some number -- not counted, but united in their chagrin -- are trying to undo the damage of having sent the IRS bad checks, or, perhaps even dumber, having made last- minute tax-deductible contributions to individual retirement accounts with checks that then bounced.

The good news is that errors like this may not turn into disasters. A bounced check to Uncle Sam "will not increase your chances of an audit," said Larry Blevins, an IRS spokesman. Indeed, a garden- variety "good faith" bounce may well end with just a $15 penalty, the same as a bank would charge. Problems arise, however, if the agency determines that a bad check is bouncing in "bad faith," in which case, it can assess a penalty of 2 percent of the check's value, in addition to late-payment and interest penalties. How does the IRS decide? Well, that depends. Each case is reviewed separately, without specific guidelines in the tax regulations, Blevins said. The auditor assigned to the case can make the decision or ask for a technical advice memorandum from the agency's Washington offices. A good way to stay out of trouble, of course, is not to let a tax check bounce twice. And a taxpayer who bounced a check last year would have been well advised not to bounce one this year. Exact figures are hard to come by, but it appears that most taxpayers don't mess around. "Bounced checks happen so seldom we don't even keep records on them," said Linda McDougal, a spokeswoman for H&R Block, the tax preparation giant. The IRS experience seems much the same: Far fewer than 1 percent of the millions of checks the agency receives annually -- more than 22 million last year for 1996 -- from individuals and businesses cannot be cashed, either because of insufficient funds or because the taxpayer has forgotten to sign the check. In the latter case, the IRS simply returns the check and asks for a signature. The news can get worse, though, when a last-minute IRA check bounces: it can mean a total loss in terms of a tax deduction. Taxpayers, of course, can make IRA deposits for the previous year right up to the tax filing deadline, and mutual funds report large jumps in such contributions. For example, Charles Salmans, a spokesman at Quick & Reilly, the discount brokerage firm, said that for the week of April 15, "check traffic from our customers increases from an average of 2,100 checks to more than 15,000." But there is no provision in the tax code for allowing a returned check to be redeposited after April 15. (And requesting an automatic four-month extension for tax filing does not extend the deadline for IRAs.) "If you wait until April 15 to make your IRA deposit, you are assuming the system will work perfectly," Blevins said. Even in the case of a bank error, the IRS is not required to credit a late, redeposited IRA check. And if the IRS doesn't count it, the taxpayer will have to pay more taxes, through an amended return. But it seems that the door is not slammed shut. Just as the tax code does not require the IRS to accept redeposited checks, it does not prevent a bank or brokerage firm from redepositing an IRA check as it would any other returned check. Each bank, broker or mutual fund makes its own decision. Spokesmen for several financial institutions declined to discuss their policies on returned IRA checks. Financial institutions do not send records of IRA payments to the IRS. "There is no document-matching program as for wages, dividends and IRA distributions," Blevins said, so such a redeposited check will come to light only in an audit; it cannot, by itself, generate one. And, during an audit, a taxpayer could ask for an individual reading of the circumstances. Assuming bank error -- or a paycheck that bounced and left insufficient funds in a checking account, or an honest mistake in checkbook arithmetic -- the taxpayer can hope for a good-faith interpretation of the error, and IRS forgiveness. But a whole new world of potential financial headaches may soon be upon us, as the IRS expands the ways that Americans can pay their tax bills. Today, most people pay them by check or money order, though an occasional eccentric shows up at IRS offices with cash. As of next Jan. 1, however, the IRS expects to start accepting debit card payments for electronically filed 1040 forms. And the IRS is now considering allowing credit-card tax payments in 2000. Regional testing of credit card payments may begin earlier, the agency said. Once the IRS permits credit card payments, imagine the opportunities for debt.