George at Travel Blogger Buzz had an interesting scoop today, sharing the news that the IRS is hoping to start taking tax payments by credit and debit cards directly, rather than people having to use third party payment processors.
His source was The Kiplinger Tax Letter, a subscription service focused, as the name suggests, on taxes. Among various other pieces of tax news was the following nugget:
The process for paying taxes by credit or debit card should soon get easier. Now, taxpayers who want to pay their federal taxes by credit or debit card must use an IRS-approved processor and pay fees charged by the processor. IRS issued proposed regs that would let it directly collect credit and debit card payments. Taxpayers using this option would still pay a fee, but the amount should be less.
In George’s post, he expressed concerns that banks could subsequently choose to classify tax payments as cash advances, thereby incurring fees and not earning rewards on credit card payments. I’m less concerned about that because banks could easily do that now when people use existing the third party payment processors.
Instead, I’m mildly optimistic for a couple of reasons. The first is that this will hopefully result in slightly lower fees when paying taxes. There are three authorized payment processors, with fees ranging from 1.82%-1.98% for credit card payments and $2.14-$2.50 for debit card payments (or 1.87% for non-consumer or personal debit cards) – see the full details here. I can’t imagine fees would drop substantially if/when the IRS processes payments directly, but any reduction would be welcome, especially for those with large tax bills.
The second reason is that it might lead to a change in the number of payments you can make each quarter. At the moment, you’re limited to making two payments per processer per quarter. That means you can make a limit of six payments per quarter and up to 24 payments per year. That’s not an issue for the vast majority of people who’d prefer a one-and-done approach each quarter, but I’m sure some would appreciate the ability to increase the number of payments if that comes to pass.
The reason this is so potentially interesting is because of the opportunity to earn rewards when paying taxes with a credit card – you can find our full guide to that here. Paying taxes can be a great way to meet the minimum spend requirements to earn large welcome offer bonuses on new credit cards. Even paying for taxes on a credit card that earns 2% cashback becomes a profitable venture versus paying directly via ACH seeing as existing payment processing fees are less than 2%.
With regards to being able to make more than six payments per quarter, this could be of interest for two types of people. One type is a person who has a substantial tax bill. Being able to make more than six payments could increase the number of welcome offers for which they can hit minimum spend requirements each quarter.
A more common scenario though likely relates to debit card payments. Staples and Office Depot/OfficeMax frequently run deals on Visa and Mastercard gift cards which provide an opportunity to earn lots of rewards by paying with a card that earns more points on office supply store spend. Those deals are always on $200 denominations, so the limit of two payments per processor per quarter limits total payments to $1,186.32 per quarter when accounting for the debit card fees charged by those third party payment processors. If the IRS were to allow an unlimited number of payments each quarter, that would allow people to easily liquidate more of those gift cards, albeit at a ~1% fee. A similar situation would apply for people paying with $500 Visa or Mastercard gift cards purchased from grocery stores, or $100 Visa gift cards when they go on sale at Giftcards.com.
It should be noted that these changes aren’t official yet, nor do we know if the IRS would actually allow more than six payments per quarter. The Kiplinger Tax Letter doesn’t give an indication as to when these changes could be expected to come into force either, although it does say that it should ‘soon get easier’, so fingers crossed that paying the IRS becomes a more appealing prospect in the near future.
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