IRS Takes Charge

By Daniel Kadlec

As if we don't have enough credit-card debt, this year Uncle Sam will begin accepting plastic from those who owe tax come April 15. Charging your taxes may be a nifty way to rack up frequent-flyer miles, and for some 30 million electronic filers it's a convenient way to complete a paperless tax return. For Uncle, it's certainly a convenient way to shift the burden of collection. But if you'll need to carry the debt a while, choosing plastic is a mistake--unless you carry it all the way to personal bankruptcy court. Let me explain.

For years, credit-card companies have been after Congress to allow Americans to charge their tax bills, a move that Congress finally authorized in the Taxpayer Relief Act of 1997. The IRS started a pilot program in January that permits you to charge 1998 federal taxes (and only 1998) on MasterCard, American Express or Discover. You simply phone 1-888-2PAY-TAX or, if you are a Discover-card holder, pay over the Internet via Intuit's TurboTax software.

The credit-card option is part of the IRS' recent customer-friendly makeover, and in our credit-card culture it's a route many people will take. Indeed, the number of taxpayers who are going plastic is running ahead of the 75,000 the agency projected this year. But this is one bandwagon you shouldn't hop on quickly. For starters, you'll have to pay the typical 2% or so transaction fee that merchants normally cover when you whip out plastic at the mall. On the average expected federal-tax balance of $2,200, the fee is $49, or 2.2%. (For a complete fee schedule, go to www.usaudiotex.com. On top of that, you'll pay the interest expense for your card, probably 14% to 18% annually.

You'd be better off tapping a home-equity line of credit, where the interest rate is far lower and tax deductible to boot, or taking a loan from your 401(k) plan at work or from some reputable lender. You'd even be better off cutting a deal directly with the IRS. That's right. The IRS must offer you an installment loan on the taxes due if you meet certain criteria: you owe less than $10,000; have filed a tax return and paid tax in each of the previous five years; and agree to pay off the balance within three years. There are a few other minor conditions, a $43 application fee and annual interest expense of around 7%. There's a monthly late fee too that comes to 6% annually. But all in all it's a better deal than a high-interest credit-card loan.

Potential deadbeats, though, will want to charge their taxes early and often for two reasons. First, if you end up being hounded for the money, you don't want the IRS on your case. The agency can and does garnish wages and place liens against or confiscate property. A credit-card company is a pussycat by comparison. Sometimes it will simply write you off as a cost of doing business and place a blot on your credit report. At worst, it will hand off your debt to a collection agency, which can plead and annoy but not confiscate. And should you file for bankruptcy, the first debts a judge discharges are often those related to credit cards. Tax bills almost never get forgiven.

Of course, most people get refunds, or have the means to pay Uncle's tab. So if the convenience is worth it, charge away. But if you're cash poor and may be that way for many months, you have better options than running up the nation's already staggering $559 billion credit-card balance.

See time.com/personal for more on e-filing. E-mail Dan at kadlec@time.com And see him Tuesdays on CNNfn at 12:45 p.m. E.T.