Backup Plan

It could happen to anyone. Sales boom one year but drop the next, or a personal emergency drains your cash. Suddenly, it's tax time and you can't pay what you owe.

Many people simply don't file taxes when they can't pay, says Alvin Brown, a career IRS attorney who now directs the nonprofit IRS watchdog group the IRS Forum. Nonfilers are subject to fines, and the IRS can seek to collect the debt forever. Instead, use one of these options to settle your debt.

1. Installment plans: If you don't have the full amount now but could pay over time, you can propose an installment agreement via IRS Form 9465. For debts over $25,000, you must also submit Form 433-F. Both are available at www.irs.gov.

2. Compromise offers: If you will never be able to pay in full, you can ask to settle the debt through an Offer in Compromise--a proposal to pay less than the full amount. You'll need to explain why your life circumstances make it impossible to pay the whole bill. Be sure to note if you are contesting the amount you owe. Depending on the length of payment plan you propose, you may need to submit 20 percent of the total compromise with your proposal, a new rule as of last July.

Remember, with either option, you'll pay interest. And be sure to file tax forms and make all payments on time, or the IRS can cancel your deal.

Seattle writer Carol Tice reports on business and finance for The Seattle Times, Seattle Magazine and other leading publications.

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This article was originally published in the February 2007 print edition of Entrepreneur with the headline: Backup Plan.