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1/10/2002

IRS Allows Tax Payment by Credit Card

Kate Traynor

A policy adopted last December by the Internal Revenue Service (IRS) allows people who owe federal income taxes for 2000 or 2001 to pay their tax bill by credit card.

The credit-card payment option is open to people who file paper or electronic versions of IRS form 1040. In most cases, taxpayers can use an American Express, MasterCard, or Discover credit or debit card to pay the IRS. Visa U.S.A. does not currently participate in the federal tax payment program.

Instead of directly accepting credit card payments, IRS has authorized a handful of tax preparation services and credit-card service providers to process the payments. These third-party service providers may charge what IRS calls a "convenience fee" to consumers who pay their taxes by credit card. Official Payments Corp. and PhoneCharge Inc.—two services authorized by IRS to process the payments—charge a convenience fee equal to 2.5 percent of the amount owed to IRS.

The convenience fee apparently offsets a provision in a federal law that prohibits IRS from compensating private-sector companies for charges they incur when processing credit card payments.

The obvious benefit of using a credit card to pay your federal taxes is that you can extend your payments over many months without incurring interest and penalty fees from IRS. You may even earn frequent-flier miles or other bonuses offered by your credit card issuer. But if you do charge your tax bill, the total amount of money that you pay, if you have a high-interest-rate credit card, may exceed the taxes, penalties, and interest that you would otherwise owe the IRS.

To learn more about this and other recent changes to IRS policies and federal tax law, visit www.irs.gov/plain/news/foryou/index.html.