NORTH PALM BEACH, Fla. (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 IRS bill. But a quick fix could be an expensive one for most taxpayers.
For a $3,000 balance, a credit card payment can cost a total of $7,699, while paying by the IRS installment plan would come to $4,061.
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 .
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 1/2 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.