Answer: Most importantly – File your return on time! The penalty for not filing is 5 percent of the tax due per month, up to 25 percent. The penalty and interest for not paying on time is around 1 percent of the tax due per month.
If you think you will have the balance due within the next three to four months, I would recommend that you send in what you can with the tax return. Then every time you receive a collection letter from the IRS (about every 30-45 days), send in another payment and a letter requesting more time. If you still have an unpaid balance that you cannot pay by the time you receive the “Intent to Levy" letter, you should then request an Installment Payment Agreement.
If you have a balance owed that you know you cannot pay in the next three to four months (or if you received the “Intent to Levy” letter), you should file Form 9465 to request an Installment Payment Agreement. This assumes 1) that the balance due is less than $25,000, 2) that you will be able to pay the tax (plus penalties & interest) within five years, and 3) you do not have an agreement in effect for a prior year. There is a user fee of $105 ($52 for taxpayers who make their payment using a direct debit from their bank account).
If you do not qualify for the Installment Payment Agreement, you should contact your tax preparer for help working with the IRS to reach an agreement that works for you.
Like any good CPA, I need to add a disclaimer: Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well researched or written. And remember, I love my readers but having me bookmarked on your computer doesn’t make you a client: before relying on any information given on this site, contact a tax professional to discuss your particular situation.