Credit card companies are pleased the Internal Revenue Service will begin accepting card payments but are still griping about 1997 legislation that prohibits the agency from paying card processing fees.

This month the IRS unveiled its plan for accepting credit card payments in 1999 under a mandate to become more cost-efficient and make it easier for citizens to file tax returns.

But Visa U.S.A., MasterCard International, and others argue that the plan is inefficient and discriminates against credit cards as a form of payment. Filers would have to pay a "convenience fee," the equivalent of the processing fee that is normally paid by a merchant.

Visa, which has rules prohibiting merchants from charging credit card users higher prices than other customers, is refusing to let its brand be used in making federal tax payments.

The card industry in general argues that any surcharge for using credit cards discriminates against this payment method.

Nevertheless, MasterCard, American Express Co., and Novus Services Inc.- the unit of Morgan Stanley, Dean Witter & Co. that issues the Discover and Private Issue cards-are going along with the terms for tax payments.

Novus Services announced an agreement with the IRS last week to let customers using Intuit Inc.'s TurboTax or MacInTax software pay their taxes on-line. It is the first program allowing both tax filing and payment electronically at the same time.

The controversy raged for eight years as lobbyists for the card associations fought for banks' right to charge a merchant-like processing discount to the IRS.

The card industry lost last year when Congress enacted that prohibition in the Taxpayer Relief Act.

Legislators said the government should not have to pay part of its tax revenue-a typical merchant fee is 2% of the transaction amount-when a citizen may be earning frequent-flier miles or other fringe benefits.

Visa's holdout against the IRS may be temporary.

"We are looking at how we can comply with this opportunity and how we can (avoid) violating our own policies," said Armen Khachadourian, senior vice president of new market developments, Visa U.S.A.

Taking a swipe at MasterCard, Mr. Khachadourian said, "We take a more cautious interpretation of our rules. It looks like the other associations didn't take the time to investigate this."

He suggested Visa will one day be among the brands the IRS accepts.

"If our cardholders are willing to pay this fee, then maybe we will allow this," Mr. Khachadourian said, adding that Visa will decide in a few weeks.

A MasterCard lobbyist was critical of the rule.

"Ultimately the IRS should be allowed to absorb the (processing fee) like any other merchant," said William P. Binzel, MasterCard's vice president for government relations.

Mr. Binzel called the IRS plan "cumbersome" and said it may violate the agency's mandate to streamline.

The problem, he said, is a contract between the IRS and U.S. Audiotex, a San Ramon, Calif., company that will handle phone calls from filers who want to charge their tax bills.

Mr. Binzel said the anti-fee provision forced the IRS to rely on an outside firm that would be able to levy the charge and pay it to the banks.

Mr. Binzel said the arrangement with U.S. Audiotex is inefficient because the company must match tax filers' payments with the tax returns they send in.

"Efficiency dictates that Congress go back and address the prohibition," Mr. Binzel said.

Fred Gore, MasterCard's senior vice president of U.S. acceptance, was more positive, saying the IRS is taking "a strong first step."

Mr. Binzel's counterpart at Visa, government relations vice president W. Lamar Smith, said, "We still find it hard to understand why the IRS should be willing to pay for the collection of a paper check but not for the collection of credit."

Mr. Smith said Visa is discussing this and related issues with members of Congress.

But sources familiar with the government's position said it is unlikely the Taxpayer Relief Act will be amended to satisfy the credit card industry.

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