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Explore all of your options before
you pay taxes with a credit card

If you're strapped for cash, there's an easy way to get Uncle Sam off your back: Use a credit card to pay that IRS bill. But a quick fix could be an expensive one for most taxpayers.

For the second year in a row, taxpayers can use plastic to satisfy their debt to the federal government. The program was a hit last year, with filers charging $147 million on American Express, MasterCard and Discover to cover their 1998 returns. Visa, which has more than 50 percent of the card market, is not participating.

Business is expected to accelerate this season because the IRS has expanded credit card authorizations to include estimated taxes and extension payments.

"The system has been up since Jan. 14, and it's going very well," says Bruce J. Zanca, senior vice president of Official Payments Corp., an e-payment provider that has a contract with the IRS to process credit card tax payments. "It's still early in the tax season. As we get closer to April 17, we expect to see a lot more activity."

But consumer agencies are urging people to do the math before using credit cards to pay the Tax Man. If you can't wipe out the balance quickly, you could end up forking over more than double what you owe the government.

"For the one-third of Americans who have a balance due on their taxes, credit cards could turn out to be an expensive option," says Mike Kidwell, vice president of Debt Counselors of America.

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Paying with plastic
There are three ways to pay taxes with a credit card. All of them carry extra charges.

  • Call Official Payments' toll-free number, 1-888-2PAY-TAX, and use the voice response system. The company levies a "convenience fee" of 2.5 percent to 3 percent for this service based on the amount. The fee for a $5,000 tax bill, for example, is $133.
  • File electronically using Intuit's TurboTax or MacInTax software. These programs are a service of Discover Financial Services. Discover charges 1.75 percent of the tax payment and $1 per transaction.
  • Write a "convenience check," payable directly to the IRS. Convenience checks, which come attached to credit card statements, are treated like a cash advance. There is no grace period and card companies usually charge 2 percent to 4 percent of the amount.

If you use a low-rate card and clear the balance right away, the interest savings might make up for the fees. Otherwise, you could watch your children go from diapers to debts of their own before your 1999 tax bill is paid off.

If you charge $3,000 -- which is the average tax bill -- and make minimum payments of 2 percent of the balance, it would take 26-and-a-half years to pay it off, assuming a 15 percent interest rate. The total payout: $7,699, of which $4,609 is interest and $90 is the service charge.

But if you sign up for the IRS installment plan, you have a five-year deadline. The government charges a $43 set-up fee, 8 percent interest -- until April 1, when it goes to 9 percent -- plus 0.25 percent of the balance due each month. Your total outlay: $4,061, of which $1,018 is interest.

"Using the IRS payment plan cuts the total payment by more than 40 percent," says Kidwell.

Consider other payment options
Other alternatives might be taking the money from a savings account or obtaining a short-term loan at a lower interest rate. The IRS also accepts debit card payments.

"It pays to figure out how much each option will cost you," says Kidwell.

Even those who plan to pay off the balance, but just want the airline miles or cash back, might find their rewards negated by Official Payments' fee.

If you charge $10,000 to the GE Rewards MasterCard, you get a cash rebate of $135. But the fee for that tax payment is $262.

It takes an average of 25,000 airline miles to earn a free domestic plane fare. A $25,000 IRS charge might get you the ticket, but the fee for that is $699. If the card company levies an annual fee, which most do for flight rewards cards, you could end up paying $750 or more for the trip.

A credit card, however, can be a way to avoid severe consequences. People who are certain they can't meet the IRS' installment payments, or fear they will be late with payments or miss them, might want to consider plastic.

Better the credit card issuer than the IRS
"There may be some psychological or practical value to owing a credit card company rather than the IRS," says Kidwell. "When it comes to collecting a debt, the IRS has more options than your credit card company."

The IRS can seize your bank account, pinch your paycheck, or take other income or assets. A creditor or collection agency can't touch your holdings without a court judgment. Remember that taxes paid by credit card cannot be excused by filing bankruptcy.

With the tax deadline five weeks away, consumers still have time to figure out what they owe and how they are going to pay it. This year's deadline is extended two days, to April 17, because the usual filing date falls on a Saturday.

"This is not the time to procrastinate," says Suzanne Boas, president of CCCS of Atlanta. "There may be a certain sense of dread in facing up to an IRS bill, but the sooner you can work out an acceptable payment plan, the sooner you will feel in control of your future."

-- Posted: March 13, 2000

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