Here I'll cover how to settle the tax debt you owe to the IRS if you cannot afford to pay all of it.
Offer in Compromise
The option of last resort is the Offer in Compromise, or OIC. This is an agreement where the IRS and the taxpayer settle the tax liability for less than the full amount owed. Here is how to file an Offer in Compromise.
In connection with an OIC, the reduced amount allowed to be paid must equal what the IRS believes they can reasonably collect from the sale of your assets such as real property, automobiles, bank accounts, etc.
The IRS may grant an OIC on the grounds that there is legitimate doubt that the taxpayer could ever pay the full amount of tax owed (doubt as to collectability), or there is doubt that the amount owed is correct (doubt as to liability). Also, if collection of the tax owed would create an economic hardship, the IRS may consider an OIC. Here are a few cases where there are grounds for the IRS granting an Offer in Compromise.
To request an OIC, you must send a completed Form 656, Offer in Compromise and include a $150 application fee.
And don't go for those pitchmen claiming their services will settle your tax debts for "Pennies on the dollar!" The IRS only accepted about 24% of OIC applications in 2010, so your odds are about one in four.
The bottom line is that the IRS may offer other options for folks who need to pay tax debts over time. Making a partial payment of what you owe and filing an Online Payment Agreement Application is better than not filing and not paying at all.