What If You Can't Pay Your Taxes?

When your tax bill exceeds your available funds, here are your options.

If you absolutely can't pay, there are two main approaches the IRS suggests.

Why you might want to do this: Again, pretty obvious. You don't want to have this problem hanging over your head forever.

What may be problematic: You're spilling your financial guts to the IRS, says Estill. "Thus, the IRS will have an excellent road map to assets if the offer does not succeed," he says.

But there is also a statute of limitations the IRS has to collect a debt, and an offer in compromise extends that for an extra year, plus the time the offer was being reviewed, says Estill.

As Estill puts it, if you have a tax return for 2005 that was filed on April 15, 2006, your statute of limitations currently ends on April 15, 2016. But if your offer in compromise is rejected and it took the IRS six months to review the offer and reject it, it now has until Oct. 15, 2017, to collect the debt. So that's something to think about.

And yet another concern: "There is a five-year period of compliance required after the offer is accepted, and if the taxpayer has problems with paying a tax debt in the five years following the acceptance of the offer, it can cause the offer to be revoked and the taxpayer ends up back in the same position as pre-offer," says Estill.

Whatever you decide to do, file. It can be scary dealing with the IRS because, well, it's all-powerful. Nevertheless, file—even if you can't pay.

"It doesn't get better by hiding your head in the sand just because you don't have the money," says Benson Goldstein, senior technical manager of taxation for the American Institute of CPAs, which is headquartered in New York.

[See Avoid These 10 Common Tax Mistakes.]

Goldstein adds that if for no other reason, you should file to get that decade-long statute of limitations started.

Not that you want to drag out the experience of owing the IRS for 10 years, but if you don't file, it will take longer to resolve your tax issues. What you likely won't do is go to jail or lose your house from owing the IRS, says Estill. That is, as long as you're on the up and up when working with the agency.

"There has to be some intention to deceive or defraud the IRS before criminal elements come into play," says Estill.