Using a Credit Card to Pay Income Taxes

The Internal Revenue Service makes it easy to pay your taxes using a check, money order, direct bank debit, or by using a credit card. Paying by credit card is a convenient way for most taxpayers to pay the IRS, especially when there is not enough cash on hand.  However, using credit to pay the IRS has some risk, especially if you are insolvent.

If you are contemplating bankruptcy, it does not make sense to pay the IRS with a credit card. To begin, the tax debt may be dischargeable in bankruptcy. Tax debts are generally dischargeable if the following conditions are satisfied:

  • The taxes are income taxes.
  • You did not commit fraud or willful evasion.
  • The debt was originally due at least three years before you filed for bankruptcy.
  • You filed a tax return for the debt at least two years before bankruptcy.
  • The tax debt was assessed by the IRS at least 240 days before you filed bankruptcy (and the IRS did not suspended collection activity because of an offer in compromise or a previous bankruptcy filing).

Any use of credit with no intent to repay may be fraudulent and even criminal. At the very least a debtor who uses a credit card to pay taxes and then files bankruptcy to discharge the credit card debt runs the risk that the debt would be excluded from discharge.

Additionally, the Bankruptcy Code provides that if a debtor borrows money to pay a debt that is not eligible for discharge in bankruptcy (such as a recent income tax debt), that new debt is non-dischargeable. In other words, if you use a credit card to pay your non-dischargeable tax debt, the credit card debt is not discharged in bankruptcy. Even if you pay the IRS and wait a year to file bankruptcy, you run the risk that the credit card company will discover that you used the card to pay the IRS.

Before you pay the IRS with a credit card, get professional advice. If you are experiencing financial difficulties in addition to a large tax debt, bankruptcy is a good option to restructure your finances and keep the IRS in check. Even if you are not able to discharge your tax debt, bankruptcy can force the IRS to accept reasonable payments.