Some business owners may be getting a nasty, sinking feeling right now, as they realize that April 15 is looming and they can't pay their taxes. That can happen easily if business was good for much of 2008 but has fallen off since. Michael Rozbruch, CEO of Tax Resolution Services in Encino, Calif., says he expects 2009 to set a record for the number of taxpayers unable to pay their full tax bill on time.

Fortunately, the Internal Revenue Service offers several options for taxpayers in trouble. The most important thing to do is tell the IRS right away. If you're honest about the situation--and continue filing tax forms on time--you may be able to work out a payment plan, or settle the debt. If you don't file, there's no time limit on how long the IRS can try to collect.

Rozbruch says filing on time will save you a 25 percent late penalty. When you send your tax return, include a check for a small amount--even $10.

"This creates a record of your good-faith, credible effort to send in some money," Rozbruch notes.

Possible strategies for resolving a tax debt include:

  • Noncollectible status. If you believe your problems are temporary, you can have your account placed in "currently not collectible" status. You'll need to prove your monthly income equals or exceeds essential expenses, and that any assets such as home equity are inaccessible to you now.
  • Short-term payoff. If you'll have the money you need shortly, you can avoid fees by arranging to pay your taxes in up to five monthly payments.
  • Installment plan. A Payment Agreement gives you up to two years to pay the tax debt in monthly installments. Interest and fees will rack up over time, so it's beneficial to pay it off ASAP. The IRS is currently charging 5 percent interest--but it's compounded daily, so it adds up fast. You can apply online here.
  • Settlement offer. If you can demonstrate that you'll likely never be able to pay the IRS all you owe, you can apply for an Offer in Compromise. The offer will propose settling the debt by paying a smaller amount in monthly installments.

Not all offers in compromise are accepted--in 2007, Rozbruch says, the IRS accepted just 12,000 offers of 46,000 submitted. But if you can make a strong case, you may be able to reduce the tax you owe. If your offer is rejected, you can appeal. The IRS has indicated it will review changes in home values in rejected offers to see whether sinking home values now qualify the applicant.

If you set up any kind of payment plan with IRS, be sure to make your payments. If you miss payments, the IRS may demand immediate payment in full. If you can't make a payment, call the IRS right away. Given the economy, Rozbruch says, the IRS has indicated it may be lenient with taxpayers who're upfront about their problem.