The IRS wants its money—electronically

The feds are taking a lesson from PayPal.

Following the lead of the popular eBay payment company, the IRS is focusing on getting citizens to not only file their tax returns electronically but to pay their tax bills that way, too.

Taxpayers can e-pay through electronic funds withdrawal this tax season, or they can use special software to e-file and e-pay at the same time.

“E-payments reduce paper voucher handling and storage needs and increase accuracy,” said Larry Faulkner, IRS senior manager for e-payments and e-business. Integrated e-file and e-pay options ensure that such data as Social Security number, name and payment amount match, he said.

Taxpayers can pay by credit card through the integrated e-file and e-pay option or by making a payment separate from the tax return through one of two authorized Internet sites run by Official Payments Corp., a wholly owned subsidiary of Tier Technologies of Reston, Va., or Link2Gov Corp. of Nashville, Tenn.

Last year, 1.75 million taxpayers paid their federal taxes by electronic funds withdrawal and credit card transactions.

“Once a taxpayer tries an e-pay option for the first time, they rarely go back to the antiquated way of doing things,” said Michael Cavanaugh, executive director of the Council for Electronic Revenue Communication Advancement of Alexandria, Va., a trade group of e-filing and electronic revenue organizations. E-payments are quick, efficient and make sense, and “everybody clearly benefits,” he said.

To e-pay, taxpayers typically authorize electronic funds withdrawal from a bank account, use a credit card or enroll in the IRS’ Electronic Federal Tax Payment System (EFTPS).

The IRS has entered into agreements with credit card processors and tax preparation software developers to make electronic payments available.

The software accepts the electronic tax return and the credit card information, both of which are forwarded to the IRS. Then one of the authorized payment processors—Official Payments or Link2Gov—receives the credit card information, transmits the payment to the IRS through encrypted payment files via dedicated circuits to a Treasury financial agent. The IRS has deals with JPMorgan Chase & Co.’s Bank One of New York and Bank of America Corp. of Charlotte, N.C., to serve as financial agents and transmit the payment files for the final leg to the IRS.

On the card

Taxpayers may use American Express, DiscoverCard, MasterCard International and Visa to charge their payments. The credit card companies charge fees.

Taxpayers can make any kind of tax-related payments through the Electronic Federal Tax Payment System but must enroll first. EFTPS targets users who make multiple payments annually, such as businesses and tax professionals.

Users must have a secure Internet browser with 128-bit encryption to access the site and provide three pieces of identification for authentication: a taxpayer identification number, EFTPS personal identification number and password.

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