Consequences

• When you have unpaid federal taxes, the consequences can be quite severe if you choose to ignore the IRS. Commonly, when you have unpaid taxes, you accrue interest and penalties. However, the IRS consistently waives or reduces penalties for taxpayers who voluntarily cooperate and show a sincere intention to eventually paying the tax in full. In addition to interest and penalties, the IRS also has the authority to place levies on your personal property. If the IRS places a levy on your home, for example, then it greatly hinders your ability to sell it since the levy remains on the home even after there is a new owner, making it unmarketable.
  
  

Installment Agreements

• In some circumstances, the IRS will allow you to enter into an installment plan to make periodic payments on your unpaid taxes. Your request for an installment plan is guaranteed to be accepted by the IRS if the amount you owe is not more than $10,000, if your last five tax returns were filed and paid on time, you haven't entered into an installment agreement during the last five years and you agree to pay the tax in full within three years. In addition, you must furnish the IRS with all relevant financial information for it to ascertain that you cannot make a payment in full. To request an installment agreement, you must send prepare IRS Form 9465.
  
  

Economic Hardship Extension

• If you don't qualify for an installment agreement or prefer to receive a shorter extension of time to pay your unpaid taxes, then you can submit IRS Form 1127 to request a six-month extension of time to pay your taxes. The IRS will not approve your request unless you can demonstrate you will suffer an undue hardship if payment were required immediately. This requires a showing of severe consequences such as having to pawn expensive family heirlooms or other assets. Obtaining this extension will delay any adverse collection activities by the IRS.
  
  

Offers in Compromise

• An offer in compromise is available only in the severest of circumstances. Generally, your request for a compromise will be rejected if another course of action is more appropriate, such as an installment agreement. This offer allows you to propose a reduced amount to the IRS that will settle your unpaid tax debt in full. You must convince the IRS that it's unlikely you will be able to make installment payments and that their collection efforts will be unsuccessful. You can submit an offer on IRS Form 656 accompanied by an application fee and a nonrefundable payment equal to at least 20 percent of your offer.