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Owe Taxes? Just Charge It

Beginning next year, the federal government will accept credit cards for Americans' income tax bills.

Although taxpayers will be charged a yet-to-be-determined "convenience fee" for the privilege, the Internal Revenue Service hopes the move will encourage more people to file returns electronically. About 24.5 million did so this year.

"Our responsibility, we believe, is to give folks the widest possible array of payment options," said Steve Holden, the national electronic program director at the IRS. "Many consumers will find it convenient to use their credit cards."

One major question is whether Visa International, the world's largest credit card issuer, will get on board. Company officials there will decide this fall whether to give the program a try.

Under the plan, taxpayers next year will be able to pay IRS bills two ways with credit cards:

  • Holders of MasterCard, American Express, Discover, and possibly Visa, cards will be able to charge their balances due by calling a toll-free number. It won't matter whether the tax returns are done manually, through a paid preparer, or electronically. This phone system is being run by US Audiotex of San Ramon, Calif.
  • Holders of Discover or Private Issue cards issued by Novus Services Inc., who use Intuit's popular TurboTax or MacInTax preparation software, will be able to complete and file their returns and pay their taxes using personal computers.

In both cases, taxpayers will be charged fees for the service, based on the size of their tax bills. Officials at Audiotex and Novus said they have not determined how much the fees will be or how they will be calculated.

But one factor in how those fees are determined is whether Visa will join the other card issuers on the Audiotex system.

Visa, with about 600 million cards in circulation, wants taxpayers to be charged a flat fee rather than a fee based on the tax bill, an arrangement Audiotex believes would cost it money, said Steve Johnson, Audiotex senior vice president.

Visa officials did not immediately return calls seeking comment Thursday. Johnson, however, said the company's board of directors is likely to vote in October on whether to try the program.

Many believe Visa, which has about half the U.S. credit card business, will find it difficult to ignore such a potentially huge market.

"There's too many chips on the table for them not to do it," said Frank O'Leary, treasurer in Arlington County, Va., which had the first credit-card taxpaying system in the country.

The IRS previously was hamstrung in setting up such a payment system for federal tax bills because of the issue of fees that merchants normally pay to credit card issuers.

In the 1997 tax reform law, Congress said the federal government should not pay such fees, which forced the IRS to implement the floating-scale plan that shifts the fees to taxpayers.

In Arlington County, the credit-card system has proved popular for paying property and personal taxes, O'Leary said. About 10 percent of the suburban county's taxpayers used credit cards in 1997, the plan's first full operational year.
For tax collectors, less paper is cheaper. Credit card transfers occur much more quickly and reduce the need for extended business hours or extra personnel to process thousands of last-minute returns.

Also, it won't matter if a tax deadline falls on a weekend.

Some experts worry that taxpayers who already have steep credit-card debt might neglect to save for their tax bills and simply use the credit method, digging their financial hole deeper.

Taxpayers who can't pay their bills up front now must request an installment arrangement with the IRS, subject to heavy penalties and interest if they fail to keep up.

"Money management is a big issue. It's clearly not for everyone," said Johnson of Audiotex. "It's for people who see this as an alternative."

Written By Curt Anderson