An offer in compromise. This is the second approach the IRS recommends if a taxpayer simply cannot pay what they owe.
In the words of the IRS, and the following is wordy but worth reading for anyone who might need to do this: "An offer in compromise allows you to settle your tax debt for less than the full amount you owe, if you meet strict requirements. This may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship. We consider your unique set of facts and circumstances: ability to pay; income; expenses; and asset equity. Generally, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. Before we can consider your offer, you must be current with all filing and payment requirements. Use the Offer in Compromise Pre-Qualifier to confirm your eligibility and prepare a preliminary proposal: http://irs.treasury.gov/oic_pre_qualifier/"
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.
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.