Many consumers find that using plastic is convenient and also boosts their rewards points. On the other hand, credit experts worry that the trend suggests more people are digging themselves deeper into debt.
The Internal Revenue Service (news - web sites) said it received 950,715 credit and debit card payments in 2004, triple the volume of 2002. An additional 834,000 payments last year were automatically transferred from checking or savings accounts, the IRS said.
"The country is moving toward becoming a cashless society," said James R. Weaver, chairman and chief executive of Tier Technologies of Reston, Va., which does card processing of IRS payments. "We're seeing more than 20 percent growth a year, and we would expect that type of growth to continue for the foreseeable future."
Tier Technologies owns the Official Payments Corp., one of two companies that manage call centers and Web sites to handle card payments for federal, state and local tax payments. Tier Technologies' site, www.officialpayments.com, along with www.pay1040.com, which is operated by Link2Gov Corp. of Nashville, Tenn., both assess fees of 2.49 percent of the tax payment to cover processing costs.
That means a consumer who uses a credit card to pay a $1,000 tax bill would have to add an additional $24.90 in processing fees.
Credit experts are concerned that for some consumers, the use of credit cards to pay taxes is a sign they're mismanaging their money.
David C. Jones, president of the Association of Independent Consumer Credit Counseling Agencies, said people who find they're short of money to cover taxes as the April 15 filing deadline approaches probably haven't had enough withheld by their employers. Or they haven't set money aside in anticipation of their annual tax bill.
"That's just bad financial planning," he said.
Jones sees no problem charging taxes if the consumer can pay the bill in full at the end of the month.
"But many can't, so they're essentially taking out a loan — at a very high interest rate — and that's one of the worst things you can do if you're already in trouble," Jones said. These consumers might be better off, he said, tapping a line of credit against their homes or taking a short-term loan from a credit union or local bank.
And, he said, those consumers should immediately go to their employers and increase their tax withholding so future tax bills are covered.
Kathy Seitz, a managing partner with CBIZ Accounting Tax & Advisory Services in Cleveland, said she's seeing more credit card payments by small business owners, especially those making estimated tax payments on a quarterly basis.
She noted that the two online services allow consumers to set the date they want the payment made, either from a credit card or a debit card.
"That makes it a cash management tool," Seitz said. "It means you can file your (tax) form in February and not have the money go out of your account until April 14 if you want."
She also expects continued growth in both e-filing and e-payments.
"The government is encouraging the move away from paper filing and paper (check) payments" because of the high processing costs, Seitz said. That's just fine with many younger taxpayers, she added, "because they're comfortable with it and have confidence in the system."
Another reason for the rise in credit and debit card payments is that the major providers of tax preparation software have made e-payments easier. Link2Gov, for example, has partnered with H&R Block Inc. to put a payment link into their TaxCut software; Official Payments has a similar deal with Intuit's TurboTax.
Carla Minks, director of marketing at Link2Gov, said that even consumers who file paper forms can call or go online to pay with credit or debit cards, and "the payments will be matched by the Social Security (news - web sites) number to the (tax) file."
This year, too, a number of credit and debit card issuers have offered special promotions to encourage the use of their products for tax payments.
Discover Financial and MasterCard International will waive the 2.49 percent card processing fee for taxpayers who file via their Web sites through H&R Block. The offer applies to Discover credit cards used at www.discovercard.com/taxcenter and MasterCard debit cards used at www.mastercard.com/us.
American Express, meanwhile, is allowing its card holders to offset the card processing fee with membership reward points at a rate of 200 points per $1. Several credit cards, including United Mileage Plus Signature Visa Card, offer double miles to consumers who use the card for tax payments.
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