Did you know that the Internal Revenue Service (IRS) charges a processing fee through third party providers for people who pay their taxes with a credit card? According to a recent FreeScore.com survey of 1,000 Americans, 68% are unaware of this IRS processing fee of 1.90 percent to 3.93 percent.
Further, the release reports that 66% of Americans who are planning to pay their taxes with a credit card already have a balance on the card. Adding a processing fee to an existing balance can easily increase the total amount paid for taxes. Additionally, a mounting outstanding credit card balance has the potential to severely hurt your credit scores and future buying power. Further, income tax debt is a debt that bankruptcy won't pardon.
The IRS's website states: "The Taxpayer Relief Act of 1997 authorizes the Treasury to accept these (credit card) payments for federal taxes but prohibits the IRS from paying a fee or consideration to service providers for processing these transactions." So, unlike your friendly shopping store that will cover your credit processing fee, the IRS makes you pay.
To provide taxpayers with the option of charging their taxes, the IRS has non-monetary contracts and agreements with service providers.
Also from the IRS site: "The service providers act like merchants and are necessary intermediaries in transaction processing. The service providers validate card numbers and expiration dates, obtain authorization from the card issuers and issue confirmation numbers to taxpayers at the end of the payment transaction. The service providers forward tax payment information to the IRS for posting to taxpayer accounts."
Due to these processing fees and credit interest rates that come with using a credit card, if you don't have the cash to pay your taxes and are thinking about using this plastic option, take some time to consider all of your options first.
For example, I recommend comparing the interest rate that the IRS will charge you for late payments versus the interest rate on your credit card. Or, see if you have a relative who'd be willing to loan you the money interest-free if you paid it back within a reasonable amount of time. The point is, paying with a credit card in many instances should be a last - not a first - resort.
No matter what, it is important that you send in your tax return form in on time. If you can't pay, the IRS will work with you to set up a monthly payment plan. Interest will be charged on any tax not paid by its due date, until the account is fully paid. You will also be charged a late penalty fee. The IRS website suggests considering a possibly less costly alternative like taking a loan out from a bank.
With the three-day tax return deadline extension this year because of Emancipation Day, you have three more days to figure out an alternative to paying your taxes with a credit card.
Link to IRS processing fees and payment rules and regulations: www.irs.gov/efile/article/0,,id=101316,00.html
Carrie Coghill is the Director of Consumer Education for http://freescore.com/. She has co-authored two books on personal finance, "The Newlyweds' Guide to Investing & Personal Finance" and "What's Your Investing IQ", and contributed to a third work, "Getting Started in 401(k) Investing."
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