IRS Tax Payment Plan: Don’t Pay Taxes With A Credit Card

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When you finish filing your taxes, perhaps with one of these free tax filing resources, you may find yourself owing a little or a lot to Uncle Sam. If it’s a little, good job. If it’s a lot, don’t panic. The IRS will inform you of the opportunity to pay your tax bill with a credit card through one of their IRS e-pay service providers. If you owe a lot, it may be very tempting to just put it on a credit card and worry about it later but that’s probably a very bad idea.

Paying your income taxes with a credit card is a bad idea on two levels:

  • Service fees: Most of the companies that accept credit or debit card payments charge a percentage convenience fee that ranges from 2.49% to 3.93%. The ones that offer a flat fee often have restrictions – for example Link2Gov’s $3.95 flat fee is only for debit card payments less than $1,200 (in which case you might as well use a electronic debit for free or a personal check!). Paying 2.49% on top of the taxes you have due is too high and unnecessary. Even if you have it offset by credit card rewards, you’re still paying a premium on what probably is a fairly large amount.
  • Interest payments: Credit card interest has a funny way of turning a molehill into a mountain.

What should you do? You should try to reach an agreement with the IRS on some sort of payment plan. You will still have to pay interest but you avoid double digit credit card usury rates and you can avoid the “convenience fees” charged by the third party providers.

Two IRS Payment Plan Options

You have two options, the first is an installment agreement and the second is a partial payment installment agreement. With the installment agreement, you are requesting that you be given essentially a loan from the IRS to pay back the taxes owed over a period of three years or less. Fill out IRS Form 9465 and the IRS will respond in about 30 days. Read the instructions carefully because there’s a lot of information in there that may pertain to you. For example, there you may be qualify for guaranteed acceptance if you meet certain criteria; also, if you can pay within 120 days, you can avoid the agreement fee ($105, $52 if you would’ve paid via electronic debits). The interest rate the IRS charges is typically the Federal short-term rate plus 3% and is updated quarterly. If you want the partial payment option, fill out Form 9465 as normal and then fill out Form 433-A, Collection Information Statement. It’s a little more complicated by this page covers it pretty comprehensively.

You’ll have to decide which option is best for you but I’m pretty sure the credit card route is a risky one. Even if you were to open a 0% APR credit card and get your purchases at 0% for 12 months, it’s a risky game to play unless your amount is small and you’re certain you can pay it back given a few more months.

(Photo: mlee)

{ 13 comments, please add your thoughts now! }

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13 Responses to “IRS Tax Payment Plan: Don’t Pay Taxes With A Credit Card”

  1. Miranda says:

    Great post. The IRS is usually willing to work with you, as long as you show good faith and haven’t had problems paying your taxes in the past.

  2. I agree. Sound advice. Work it out.

  3. Chris says:

    I disagree. I’ve been on the IRS’ payment plan in the past. Keep in mind they can levy you at any time for any reason – even if a payment is a day late! Will the credit card company do that? Nope. If I ever owe taxes again, you can bet I’ll put it on a card.

  4. CK says:

    I’d much rather owe Visa (Mastercard, AMEX, Discover) then the IRS. Card companies have fewer resources to make your life hell if things go wrong in repayment.

  5. thomas says:

    Not a fan of the IRS or interest rates.

  6. jennifer says:

    I’m not sure I agree–for some people. I am earning 5% in a high interest checking account. I have 0% in purchases on our visa for another year, so I paid our property taxes on visa. I would do this for our income taxes if I thought I could make a little or break even with a credit card. We have another year to earn money on our money! We keep good records, so this works for us–you just have to know what works for your family.

    • Jim says:

      Very true, if you’re diligent than you can make a little by paying down the taxes plus a small fee, but very few people are like you and able to stay on point. 🙂

  7. For me it really would depend on the interest rates of the credit cards. But with a decent credit score, there are other ways to finance the debt. There are balance transfers, introductory rates, personal loans, even student loans (for those in college or grad school). Given the same interest rate (or even slightly higher), I’d much rather owe a private company an (unsecured) loan.

  8. I had this problem last year and took out a personal loan with my credit card company. I filled out the form online in about 5 minutes, got a good interest rate and didn’t have to hassle with the IRS at all. Even Dave Ramsey, who hates credit cards, says he’d rather owe a credit card company than the IRS.

  9. Bob says:

    My problem is that the IRS takes forever in cashing my checks and their monthly statements arrive in the mail much to late to act on them in a timely fashion. Also, the payment slips seem to be addressed to different IRS locations each time. I had mailed my Febrary payment on January 22, and still my bank has not cleared it. I have yet to receive my February statement with its payment slip and envelope and the payment is due by the 28th? Is the IRS in cahoots with the Post Office and or the banks to delay checks?

  10. Ian says:

    Great article Jim,

    Thank you for sharing options and information. Regardless of what you choose, alwayas try to get all the information you can. On the IRS website they recomend you use a “credit card or get a home equity loan.” Are you serious? They do not make the interest rate they will charge you obvious, but I guarantee it is much lower than most people qualify for with a card company, especially these days. It is sad really, they seem less interested in helping citizens meet their obligations and just want to get paid. That said, most of the people I have ever talked to at the IRS are kind and will help you get started with a repayment plan.

  11. Liz says:

    I did an electronic debit payment plan so they will automatically take out the payment each month. with 3.0% that’s much less than a credit card but the woman i spoke to on the phone says that it compounds Daily and to pay it off ASAP.
    My APR is higher on some cards I have, which should i pay off first?

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