Explore your options before paying taxes with a credit card
By Libby Wells • Bankrate.com®

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 Internal Revenue Service bill. But a quick fix could be an expensive one for most taxpayers.

Since 1999, taxpayers have used plastic to satisfy their debts to the federal government. The program really took off last year. Filers charged $147 million in taxes the first year the program was offered. Last year, taxpayers charged $630 million to their American Express, MasterCard, and Discover cards. And this year, Visa is getting in on the act for the first time.

Much of the increase is attributable to the IRS expansion of credit card payments to estimated taxes and tax-filing extension payments. That number may well continue to grow as the processing companies beef up their programs, too. They now are accepting plastic payments via Internet, as well as by phone.

"The system is 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. "As we get closer to April 15, 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.

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 2000 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 (the rate is adjusted quarterly) 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," Kidwell says.

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

Even those who plan to pay off the balance but just want the airline miles or cash back, might find their rewards negated by the convenience fee. If you charge $10,000 on a card that gets you a cash rebate of $135, you'll still lose money. The tax payment fees of Official Payments or PhoneCharge will cost you $250.

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 $625. If the card company levies an annual fee, which most do for flight rewards cards, you could end up paying $700 or more for the trip. A travel agent might be able to get you a better deal.

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.

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.

The tax deadline is fast approaching, so consumers need to figure out what they owe and how they are going to pay it.

"This is not the time to procrastinate," says Suzanne Boas, president of Consumer Credit Counseling Service 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."

-- Updated: March 25, 2002