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Charge it! – Paying Your Taxes

Uncle Sam

Most of us would rather eat nails that cover tax payments with our Visa or Mastercard. In fact, most consumers prefer setting up agreements with the IRS in lieu of adding it to their credit cards. Because the government accepts the four biggest credit cards – MasterCard, Discover, American Express and Visa – there are some taxpayers who consider the rewards points they’ll earn and figure it balances out. Either way, you know it’s going to cost in either interest or fees – or both. So what is the best avenue to take if Uncle Sam is looking at you with his hand out? Keep reading as we explore the options – along with the pitfalls and benefits of those options.


First – just as it’s crucial for your credit history to make credit card payments on time, it’s just as important to handle the IRS before the deadline. Be sure you meet the filing deadline, otherwise you’re simply adding more to your total due. Also – you may not be able to pay your state taxes with credit card, so keep that in mind too. Don’t underestimate the time investment either. You can easily end up sinking an entire weekend into weighing your options. It’s just one of those proverbial necessary evils.

One reason many justify the decision to use their credit cards are the rewards programs. The number of rewards you earn will, of course, be determined by how much you actually put on your credit card. Here’s the kicker, though – you will need to carefully review the terms and conditions associated with your credit card since there are some that do not allow you to earn rewards on payments made to the IRS. That could certainly defeat your purpose. There was a time when American Express allowed card members to use their rewards points to actually pay their tax bill. You’ll need to check the terms and conditions or the site to see if your credit card qualifies. There are terms and conditions with that option, as well.

The Numbers

A few recent surveys reveal that anywhere between 10 and 12 percent of taxpayers will use their credit cards to pay the IRS. Many cite the convenience fees the IRS charges – which typically range between 1.88% to 2.35% – and that’s not even counting the third party processor fees – as reasons not to use their credit cards. What was interesting was the number of taxpayers who will settle their tax bills with one single cash payment. A full 75% of taxpayers will do this.

The survey results had some wondering just how many Americans know about the payment options offered from the IRS. Turns out, most are well aware – 64%. In fact, only about a quarter of taxpayers will actually use the IRS installment plan. Maybe they’re not considering this as an option because of how much it costs just to enter into the agreement. Taxpayers will pay fees of $52 for a direct debit agreement, $105 for a standard agreement or payroll deduction agreement or $43 if certain low income stipulations are met. These are one time fees, but don’t forget to consider the fees based on the balance you owe.


If you are considering using your credit card, you’ll want to carefully weigh the costs with each of your options. Is your interest rate a bit high? How do the IRS fees calculate based on your unique payment due? How close to your credit limits are you on your credit cards? Believe it or not, reaching or nearly reaching your limits could affect your credit scores – which can mean high interest rates offered on future financial products, so be sure to consider all of the possibilities.

Also, if you do pay your tax bill with a credit card, your goal should be to get it paid off as soon as possible. The longer you carry that balance, the more you’re going to pay in interest. If you carry more than one credit card, make sure you’re choosing the one that’s going to cost less in the long run. This is where you’ll likely have to do a bit of compromising when it comes to rewards points. If putting the balance on your rewards card that has a higher interest rate compared to another credit card with a lower APR, you might have to decide if those points or cash back opportunities truly balance out.

Perhaps the biggest benefit to simply paying the government with your card is the convenience factor. It allows a simple solution that’s no frills and no fuss. You can do it online or over the phone. You can also safely pay right up to the deadline – with the understanding that there are sometime glitches with internet connections, so that’s something you’ll want to do right away versus pushing the envelope with deadlines. This ensures no late fees or other penalties.


There are drawbacks. The biggest one is the realization that you’ve not really paid the debt; you’ve simply shifted it to a more versatile payment choice. Instead of making payments to the IRS, you’re simply making them to your bank or credit card company.

Another drawback is the processing fee that will be tacked on not by the IRS, but rather, the payment processor. The IRS says that those fees could be tax deductible and that the fee structures will vary from one service provider to another. You can find a list of the service providers the IRS has approved here.

Another consideration: if you owe more than $10,000, it may be impossible to put it onto a credit card anyway. The processors’ guidelines are different, so you’ll have to do a bit of comparison shopping.

The IRS also cautions taxpayers that once the transaction has been completed, you can’t cancel it. If there was some problem with an overpayment, you’ll get that refunded, but only after the return is processed, with a couple of exceptions. Offsets or debt on your account are two reasons.

A Kinder IRS

Finally, despite these images most of us have in our minds about the “big, bad tax man”, the fact is, the IRS is typically reasonable and understanding of circumstances many families face. While no one likes to default on their tax payments, in a tough economy, the IRS says defaults are up. You can, however, get back on track usually. There may be a reinstatement fee if your agreement does goes into default and penalties and interest will continue to accrue until the taxpayer’s balance is paid in full. Further, the IRS encourages taxpayers to contact the agency if they are concerned about going into default. Typically, the IRS will refrain from enforced collection actions, especially if it’s considering a new agreement with a taxpayer and certainly during any kind of appeals or rejection hearings. Of course, you could always itemize next year – you might be surprised at how much you’re able to write off.

What works best for you? Payment plans or charging your tax bill? Let us know your thoughts and if you’ve had experiences in the past with paying Uncle Sam. Share your thoughts in the comments, follow us on Twitter and join the conversation on Facebook.

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