Q: I heard I can pay my taxes with a credit card. Is this a good idea?
A: Paying your taxes by credit card can be done, but be aware of some serious disadvantages.
For one thing, the companies that process the payments will charge you a "convenience fee," usually 2.5 percent of the amount you pay. So if you charge $3,000 in taxes, you'll pay an extra fee of $75 which doesn't count toward your tax liability.
What's worse, financial advisers warn, it's an easy way to rack up a bigger balance on your credit card, which can take a long time to pay off at interest rates that can approach 20 percent.
Evan Snapper, a personal financial consultant at the accounting firm Ernst & Young, says that paying your taxes by credit card, even though it's sanctioned by the IRS, is generally not a good idea.
It's easy enough to request an extension to file your return, but that doesn't get you out of having to pay your taxes by April 16. So if you don't have the money on hand, your most obvious options are to take out a bank loan, which will have a lower interest rate than most credit cards, or make a request with the IRS to pay your taxes on an installment plan by filling out Form 9465.
Mr. Snapper says the IRS "will actually listen to you, and they're pretty flexible" when it comes to setting up installment plans, so long as they are made made in good faith. The deadline for asking for an installment plan is also April 15.
"They're pretty fair," Mr. Snapper said. "But if you make a deal, you've got to stick to it. If you don't, they'll put you in default and put a lien on your salary or lock up your bank account."
Michelle Lamishaw, a spokeswoman for the IRS, says setting up an installment plan with Form 9465 will cost a one-time fee of $43, plus interest, which is currently running at 8 percent. Late payment penalties of 0.25 percent of your outstanding balance may also be added to your amount due each month.
Ms. Lamishaw said that some 218,000 payments were made by credit card last year, more than four times as many as the year before, but she said the IRS does not necessarily encourage the credit card option.
"The reason we offer the credit card payments is because the taxpayers themselves requested it, so we offered it as convenience to them rather than something we were specifically recommending," Ms. Lamishaw said.
"It's up to the taxpayer to decide what they want to do," she said. "What taxpayers need to be aware of is that these companies charge fees that don't go to the IRS."
If you do decide to go with the credit card option, you can find the information you need on the IRS Form 4868, an extension to file your return. You can also find information about paying by credit card by calling (800) 2PAY TAX or (888) ALL TAXX.
Starting this year, you can also request an extension to file your return by phone by calling 1 (888) 796-1074. If you call, you'll still need the information from the Form 4868 to use as a work sheet and a copy of your 1999 return.
If you need tax forms, you can get them from the IRS Web site, www.irs.gov, or by calling (800) TAX FORM (829-3676).