Tax Bills and Plastic Don't Mix

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For the Record Appended

If you find every excuse to use a credit card to reap reward points, it might be very tempting to use it to pay a big tax bill.

You wouldn't be alone. Last year, 1.57 million people paid their taxes by credit card, 54 percent more than the year before, the Internal Revenue Service said. As many as a third of them did it just to accumulate points, says Official Payments, one of two companies that process the credit card transactions for the government.

Are you even more tempted? Jim Tehan, a spokesman for Myvesta.org, a credit counseling Web site, summed up the feeling of most credit counselors on this point: "It's absolutely ludicrous to use your credit card for taxes to rack up points."

Here's why. The two companies that process credit card payments for the I.R.S. - the other one is Link2Gov - extract a 2.49 percent "convenience fee" from taxpayers to both cover the merchant fee that the credit card company charges and to make a profit.

Since few reward cards pay more than a 1 percent cash reward, you'd be in the hole if you paid by card. That is, unless the credit card company pays your convenience fee, as Discover is doing.

It doesn't make much more sense to pay by credit card just to get airline mileage reward. The numbers will vary from one program to another, but here's how to think about it using the Chase Value Miles Platinum Visa as an example. You receive one point for every dollar spent and it takes a minimum of 24,000 points for a domestic airline ticket.

So to get one ticket, you'd have to pay a ,000 tax bill. (You'd have to have an unusually high credit limit to pull this off, but just play along with this thought experiment.) It would cost you the 2.5 percent convenience fee or, in other words, 0. Ask yourself this: How often do I buy a 0 advance-purchase ticket to travel inside the United States? The chances are, you'll lose on this deal.

What if the credit card companies sweetened the offer? Chase is doubling the miles for each dollar of taxes paid on its United Mileage Plus Signature Visa card, and American Express is doing the same for its Delta and Starwood credit cards. It's starting to feel like "Deal or No Deal."

You'd get a ticket for 8. It pays to look for the deals and if you go for this one, read the fine print first. The card companies pile on numerous restrictions. Of course.

H&R Block is trying to encourage taxpayers to use the online version of its TaxCut software with an offer of an .49 rebate if you use a MasterCard debit card to pay your taxes. Link2Gov waives the fee for users of debit cards, though such cards rarely have rewards programs. (Link2Gov is at pay1040.com or 888-658-5465. Official Payments can be reached through officialpayments.com or 1-877-754-4420.)

If you want to avoid the middleman's convenience fee you might pay with those convenience checks that come with your credit card statement. The fee for their use could be slightly lower; they vary from 2 percent to 4 percent.

Paying by credit card is dangerous for anyone who doesn't pay off the balance each month. The high interest rate that most credit cards levy on debt will make it mushroom. Rewards cards generally charge higher interest. That Chase card, for example, charges 12.24, 16.24 or 20.24 percent depending on your credit score. How long will it take you to pay off ,000 when your card charges 12.25 percent and you pay 0 of that debt each month? You'll be free and clear in 2008 after paying a total of ,373.

If you pay off the minimum 2 percent, it would take you 21 years to pay it off. (A Web site that can do this fear-inducing calculation can be found at www.maedastudio.com/2006/credit/index.php.)

If you are in that situation, transfer the balance to the card with the lowest interest rate. Another way out, if you know in advance that you won't be able to pay your taxes, is to ask the I.R.S. if you can pay it in installments. You have to fill out an application (Form 9465, found at the I.R.S. site www.irs.gov/pub/irs-pdf/f9465.pdf); if approved, you are put on a payment plan of three to five years. The setup fee is and the interest rate, which changes every quarter, is currently 7 percent with a failure-to-pay penalty of 0.25 percent a month. (If you owe more than ,000, the process - and the penalty - is more taxing.)

The I.R.S. quite firmly advises against the installment plan option and says a lump-sum payment is far better.

"A more favorable solution to resolve the debt would be to obtain a loan from a bank or other financial institution, or pay taxes using a charge card," it says. Of course, the I.R.S. would say that because it prefers to have cash in hand than an accounts receivable. Nevertheless, the agency is correct. Because of those failure-to-pay penalties, you'd be better off paying with a card charging 10 percent.

If you are teetering on the edge of solvency and considering a bankruptcy filing, you might be tempted to pay off your taxes with the credit card. After all, the government stands at the front of the line of your creditors in any proceeding and that debt can't be discharged by bankruptcy. But credit card companies stand at the end of the line with unsecured debt.

Sorry, it won't work. "They thought of that when they wrote the bankruptcy law," said Victoria S. Wright, a bankruptcy lawyer who is the executive director of financial education at Hummingbird Credit Counseling and Education in Raleigh, N.C. Any tax obligation paid by credit card in the previous three years is not dischargeable through bankruptcy. "Whether the credit card company would catch it is another thing," Ms. Wright said, "but no bankruptcy attorney would advise you to do this."

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Correction: March 8, 2006

The Your Money column in Business Day on Saturday about the use of credit cards to pay tax bills misstated how one company, Discover, was handling the user fee, which is usually paid by merchants. Its cardholders are required to pay the fee; Discover is not paying it for them.