Tax Bills a Booming Business for Credit Card Firms

The $181 million charged this year was more than double the amount expected.
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Apparently, the tax bite doesn't hurt as much when you can say, "Charge it."

The tax season that ended April 15 was the first in which you could charge your tax bill to a credit card -- and more than 53,000 taxpayers paid $181 million using plastic.

U.S. Audiotex

, hired to run the credit card program for the

Internal Revenue Service

, was expecting more transactions -- 75,000 -- but only $70 million in payments. The dollar figure was inflated by some high-income taxpayers making unexpectedly large payments. Some 140 taxpayers charged at least $100,000 on their credit cards, including about 20 who paid seven-figure tax debts. The highest amount charged: $5.4 million.

"And one gentleman inquired about paying his $19.6 million bill," says Steve Johnson, senior vice president of San Ramon, Calif.-based U.S. Audiotex.

Presumably, those who charged large sums were rewarded with airline miles or points that could be used to redeem gifts. But the value of those perks probably were outweighed by U.S. Audiotex's "convenience fee," which ranged from 2.2% to 3% of the amount charged.

"Whether it makes economic sense or not, people just wanted to get something in return," says Johnson.

Taxpayers had two options for tax bill credit card payments. They could call U.S. Audiotex's 1-888-2PAY-TAX line and use their

MasterCard

,

American Express

or

Discover

cards. Or those who filed their returns electronically using

TurboTax

software could pay the bill with their Discover cards.

The average charged payment was $3,454, according to the IRS. But the single biggest surprise came from the high-balance payments, says Johnson. Initially, the payment amount was capped at $99,999 -- but with special permission from the credit card company, a taxpayer could charge an unlimited amount.

Though U.S. Audiotex's fee decreased gradually from 3% to 2.2% as the payment approached $100,000, it was a flat 2.5% for payments above $100,000. For those who paid six- and seven-figure tax bills, that fee might be hard to justify strictly on the basis of frequent flier miles.

For example, MasterCard awards one point for every dollar charged. It takes 25,000 points to get a domestic, coach-class U.S. round-trip ticket on most airlines, worth a maximum of $500. If you charged, say, $1 million on your MasterCard, you'd qualify for 40 round-trip tickets, worth about $20,000. But, you would pay U.S. Audiotex a fee of $25,000 to charge your tax bill.

Clearly, the "freebies" weren't the only motivation. Taxpayers were "obviously looking for convenience, for flexibility to complete payment however they wanted and of course, the cardholder benefits," says Lisa Brzezicki, vice president of services industry acceptance at MasterCard.

Taxpayers from all fifty states, plus Puerto Rico and Guam, used the 888-2PAY-TAX line. Even though the 888 number was only accessible from North American phone lines, a resourceful U.S. taxpayer in Hong Kong got through anyway. He had his company dial him in to a local U.S. network so he could pay his $80,000 bill over the phone.

But in typical taxpayer fashion, 54% of payments received came through the 888 number in the last two days. "It was almost frenzy-like," remembers Johnson.

U.S. Audiotex can tell which credit card you're using based on the credit card number you enter into the phone system. Even though Visa did not participate in the program, lots of taxpayers tried to use the card anyway. "Between 40 and 50 people a day in the last week alone," notes Johnson.

He recalls one taxpayer who owed $23,000 and only had a Visa. The taxpayer, eager to charge his bill, applied for MasterCard instead. In a last minute frenzy on April 14, he realized his new card limit was not high enough. But he dialed up MasterCard, and the company increased his credit limit.

Even so, Visa has no plans to participate in the tax bill program, says a spokeswoman, adding that the company does not believe cardholders should have to pay an extra fee just to use their Visa card.

Novus Financial

reports that 8,000 cardholders used their Discover cards via TurboTax to pay the tax man. And, in most cases, those that needed a bump in their credit limit got one, says Whitney MacDougall, senior manager for government programs at

Intuit

. The average balance TurboTax users charged hovered around $1,000.

Although the 888-2PAY-TAX line was turned off after April 15, it will be functional again starting Dec. 15 so taxpayers can charge

estimated tax payments. Fourth-quarter 1999 payments are due by Jan. 15, 2000.

But the bigger perk is that the process will be paperless.

Typically, when you make an estimated payment, you must include

Form 1040-V

- Payment Voucher

with your check. But if you charge the payment on 888-2PAY-TAX, you won't have to submit the voucher, says Johnson. Every quarter, around 10 million people pay estimated taxes, notes Johnson. And most people scramble to get those payments in on time. "So this should help."

In addition, if you decide to go put your 1999 tax return on extension next April, you should be able to charge your extension payment by then, says Johnson. And you won't need to file the

Form 4868

- Application for Automatic Extension of Time to File U.S. Income Tax Return

that is required to accompany snail mail extension requests.

U.S. Audiotex is working to get the states hooked into the system as well.

No doubt, many of you decided to charge your tax bills in April, promising yourselves you'd pay the balance before the 25- or 30-day grace period expired. It's almost June. Is the tax balance still on your statement?