Paying Taxes Electronically

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By Roy Lewis
March 28, 2002

If you're one of the unfortunate folks (or fortunate, to be more accurate, since you haven't let the IRS hold your money interest-free) who have a balance due on your federal tax return, you have a number of options with which to make your tax payment.

There are actually two ways to pay your taxes electronically. They include authorizing a withdrawal from a checking or savings account (direct debit) or using a credit card. In fact, e-payments can be used for a number of different things for tax year 2001:

  • The balance due on your 2001 federal tax return
  • A projected balance of taxes due if you choose to pay with a request for an automatic extension of time to file your return
  • Estimated tax payments for tax year 2002

If you pay your extension payment or your 2002 estimated tax payment via e-payment, you won't even have to file the respective forms when you make your payment (Form 4868 for an extension, Form 1040ES for estimated tax payments).

Additionally, there are many states that now accept e-payments for state tax balances due or estimated tax payments, so don't overlook your state payments if you decide to go the e-payment route.

Direct debit
If you decide to pay your taxes by direct debit from a checking or savings account, you won't incur any fees. Not only that, you can designate a future date for the actual withdrawal to occur. But in order to use a direct debit, you must e-file, either by a computer or by phone. It's not available if you decide to file using a normal paper return.

Since you can choose when the payment is debited from your account, you can file early, but schedule the withdrawal as late as April 15. For returns filed after April 15, the payment will be effective on the filing date. But remember that if April 15 falls on a Saturday, Sunday, or legal holiday, you've got until the next business day to file your return and/or pay your taxes. For your 2001 tax returns, your actual filing date is April 15, 2002.

Credit cards
If you decide that electronic filing (and therefore the direct debit) isn't your cup of tea, you can choose to make your payment by credit card. Using a credit card is much more flexible, since a credit card can be used for payment even if you decide not to e-file.

But be aware: There is a "convenience" fee for using your credit card, and this fee is set by the private sector processors and not the IRS. These fees can be pretty hefty, so make sure that you think twice before using your credit card for payment. Your tax payment and the convenience fee will be listed separately on your credit card statement.

The IRS has authorized two companies to accept credit card payments from both e-filers and paper filers. They are the Official Payments Corporation and Phone Charge, Inc.

Official Payments Corporation: At Official Payments, you can pay the IRS, 21 states, the District of Columbia, and more than 1,200 counties and municipalities in all 50 states. And it's not just taxes -- you can also pay fees, fines, bills, and more. You can use an American Express card, Discover card, MasterCard, or Visa card to pay your taxes by phone or via the Internet. Dial 1-800-2PAY-TAX (1-800-272-9829) or point your browser to www.officialpayments.com.

Phone Charge, Inc. (PCI): PCI lets you pay your individual income taxes over the phone or Internet using an American Express card, Discover card, or MasterCard. Dial 1-888-ALLTAXX (1-888-255-8299) or visit www.1888ALLTAXX.com.

Each company has its own fee schedule, and each offers both phone and Internet payment services. You can use either of these services to charge taxes to your American Express, Discover, or MasterCard account. Until recently, Visa was not a participant in the credit card payment program. But it was announced just recently that Visa finally jumped on the bandwagon. So now you have one more credit card option with which to pay your taxes. 

Again, there's no reason to not file early, and then wait until mid-April to make your credit card payment. So the credit card option is very handy for those folks who are still paper filing.

One last word about using credit cards to make your tax payment: You might think that if you have an affinity or mileage card, you'll earn credits for the payments that you make. And you may be right, but you also may be wrong. Check with your bank before you take the credit card payment plunge in order to determine if your payment will be treated as a purchase (earning you mileage or affinity points) or as a cash advance (generally not available for mileage or affinity points).

Now, if Uncle Sam could just make computing your taxes as easy as paying them!

Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.

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