IRS to accept credit cards for tax payments

Almost 45,000 charged $174 million during pilot program in 1999


If you think tax refunds are something to relish, just imagine taking a holiday vacation paid for by Uncle Sam even when you owe taxes.

That's just what happened last year to a handful of taxpayers who were able to settle their tax bills with a credit card as part of experiments by the Internal Revenue Service. Things went so smoothly the agencies have swung open the door this year -- delighting taxpayers eager to accumulate airline points they can redeem for free tickets and seating upgrades.

Is it worth it to pay your tax bill with plastic? Usually not. Beware of those "free" miles, because they come with a service fee tacked on by the company that handles credit-card payments for the tax collectors. But as with so many other tax matters, a savvy consumer can exploit the exceptions.

"It works. It's the greatest thing going," said Robert B. McKinley, chief executive officer of Inc., a credit-card information service. But he added, "You have to sift through this thing and do the math."

This is the second year taxpayers have had this opportunity. But last year's pilot programs allowed only certain classes of taxpayers to say, "Charge it." This year, the IRS will let anyone pay their 1999 taxes, as well as the bills they project when they file for an extension and their estimated tax payments for this year, with a credit card. You can use a MasterCard, American Express or Discover card, but Visa does not participate.

Last year, nearly 45,000 federal taxpayers charged almost $175 million under the pilot program. Nearly 150 taxpayers charged at least $100,000, with one going as high as $5.4 million. Those high-rollers aside, the average charge was about $2,700.

Consumer advocates and debt counselors warn that the main risk of charging your tax bills is the same as with any other big credit purchase: If you're undisciplined or short on cash, you can spiral deeper into debt carrying interest rates of 18 percent or higher. And that's on top of the credit vendor's service fee that adds about 2.5 percent to 3 percent to the bill.

As counterintuitive as it sounds, arranging an installment plan with the IRS is a bargain by comparison. The agency charges an effective interest rate of about 14 percent. "These are the people who feel they don't want to owe the IRS, they're afraid of the IRS," said Sharon Kreider, a CPA and tax lecturer. "They're actually better off owing the IRS."

But air-mile collectors are in a different class --- probably business or first class. For them, air mileage is a currency unto its own, with rules dictated by fine print that can make Form 1040 instructions seem like potboiler.

For starters, it's important to understand that credit-card companies typically charge merchants a fee of about 2 percent of each transaction. By law, however, the IRS cannot swallow such fees, so their intermediary, Official Payments Corp. of San Ramon, Calif., levies a "convenience fee" that adds about 2.5 percent to 3 percent to each tax bill. For example, it costs $87 to charge that $2,700 bill, a fee of 3.2 percent.

In contrast, most MasterCard, American Express and Discover reward programs kick back points or mileage worth about 0.5 percent to 2 percent of a transaction, McKinley said. That's no bargain.

In general, the economics of charging your taxes to accumulate air mileage for domestic tickets is suspect. Most cards rebate a mile per dollar charged, and you must redeem about 25,000 miles to get free air fare.

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