Paying the IRS with Plastic

Stan Rose, Tax Director
March 2012

With the April 15 tax filing deadline fast approaching, grousing about paying off remaining taxes is coming back into vogue.  Pesky credit card bills are annoying too, on a more frequent basis.  The purpose of this article is to warn of unintended consequences if you combine these two formidable nuisances.  Anyone tempted to build up some frequent flyer miles by paying off Uncle Sam with a credit card should be aware of a potentially surprising cost.

Credit Card Fees

Many people may be faced with IRS liabilities that cannot easily be paid by April 15.  While the IRS offers the ability to pay many taxes by credit card (including tax owed with Forms 1040 or their extensions), there is a very significant difference between these transactions and the ones, for example, you might undertake at Best Buy or Staples.  That difference involves the convenience charge. 

As many people know, anytime a credit card is used, an aptly-named convenience charge is incurred for the convenience of using the card.  Those charges often equal between 1.5% and 2.5% of the retail cost of the product.  This charge is not given much thought by most of us because usually we never pay it or even see it.  Instead, the merchant generally incurs that fee.  Obviously merchants are aware of our propensity to pay via credit cards, so their retail prices are set high enough to cover it.  However, the charge usually is transparent to the consumer.

By contrast, the IRS will not absorb convenience fees.  You, as the taxpayer, must pay it.  For example, a fee of 2.5% assessed on a tax balance of $1,200 will equal $30.  Because it is assessed as a percentage rather than a fixed fee, though, the amount can be surprisingly high.  A balance due of $20,000 could result in a very inconvenient “convenience fee” of $500!  Obviously, using this method as a short-term fix while “moving money around” on April 14 or 15 is inadvisable.  We recommend that you plan ahead to avoid it, or at least be fully aware of the consequences.

Alternatives

The IRS offers other means to pay your taxes.  For taxpayers with available funds, payment by check, automatic withdrawal from your bank account and debit cards are alternatives.  Note that while a convenience charge will be assessed for using a debit card, you can expect a relatively modest fixed amount, generally approximating less than $4.  Taxpayers without available funds have alternatives to credit cards as well.  Any taxpayer may request an installment agreement or an offer in compromise of the IRS.  Both of these options involve negotiations with the IRS.  Fees and interest may be charged as part of these negotiations, but the IRS often will entertain reduced payments or a payment plan with taxpayers who can demonstrate the inability to fully and immediately pay their taxes.

Additional Guidance

More information addressing how to pay IRS bills by credit or debit cards and applying for installment agreements or offers in compromise may be found at the following links on the IRS website:

http://www.irs.gov/efile/article/0,,id=101316,00.html

http://www.irs.gov/Individuals/Offer-in-Compromise-1

Don’t Hide Your Head in the Sand

Finally, if you do owe money to the IRS and cannot pay, be sure to address the issue with the IRS on a timely basis.  Whether or not you have the money to pay the amount due, it is important to file your tax return or extension on time.  Anything short of paying in full may cost you some interest, fees or penalties, but the penalties are significantly worse if you fail to timely file the forms.

If you would like to discuss this matter further, please call Stan Rose or your BNN professional at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter. 

IRS CIRCULAR 230 DISCLOSURE:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.