If You Can't Pay the Income Taxes You Owe

Have you prepared your tax return only to find that you owe way more taxes than you can pay by April 15th? Have you come through an IRS audit only to be looking at a huge amount of tax debt? There are steps you can take now that will help you to make peace with the IRS in the long run.

Request An Extension to File Your Return

You're entitled to an automatic extension of four months past April 15th, using IRS Form 4868. But if you don't pay at least 90 percent of the taxes you owe by April 15th, the IRS will sock you with penalties and interest of up to one percent of the amount you owe, per month.

File A Return and Pay What You Can

If you don't file an extension or a return by April 15th, the IRS will charge you a penalty of five percent of what you owe per month. So it's best to file a return and send in what you can scrape together.

Work Out An Installment Plan

In order for the IRS to consider making an agreement for an installment plan:

• You must have filed returns and paid your taxes for the five years immediately prior to incurring the tax debt you can't now pay all at once
• If you're self-employed, you must be up to date on your quarterly estimated tax payments
• You must promise to file tax returns and pay all tax due while the installment agreement if in effect
• You must not have had an installment plan agreement with the IRS within the past five years

If you owe $10,000 or less (not including penalties and interest), you may be eligible for a guaranteed installment plan agreement if you'll be able to pay the entire amount you owe within three years.

If you owe $25,000 or less, you may qualify for what the IRS refers to as a "streamlined" installment agreement, if you'll be able to pay the entire amount you owe within five years.

If you owe more than $25,000, you may still be able to negotiate an installment plan, after you've provided extensive financial information to the IRS.

Settle On An "Offer in Compromise"

If your financial situation is really dire, consider what the IRS calls an "offer in compromise" ("OIC") to pay only a portion of what you owe.

For the IRS to consider an offer in compromise from you, you must convince the IRS that it's doubtful they'll be able to collect what you owe them, either now or in the future. The IRS calls this "doubt as to collectability."

The IRS won't accept an offer in compromise unless the amount of money you're offering is at least equal to value of all your assets plus all the money the IRS thinks they can take from any future income you may have. You must have already filed all returns due, and you can't be involved in bankruptcy proceedings.

Bankruptcy

A Chapter 13 bankruptcy offers powerful and inexpensive solutions for your tax troubles. You can:

• Get rid of tax penalties and tax liens (or at least reduce tax liens to the current value of your assets)
• Avoid paying interest on your most recent tax bills
• Avoid paying taxes for the years for which you haven't yet filed a tax return

Unlike installment plans or "offers in compromise," which deal directly with the IRS, Chapter 13 bankruptcy requires minimal paper work and is policed by a judge in the event of disagreements between you and the IRS.

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