The worst tax mistake you can ever make is not filing a return at all
I've counseled a number of people lately who, suspecting that they had to pay taxes, didn't file their returns -- for years.
The IRS has finally caught up with them, and now they are facing possible tax liens. They never attempted to contact the IRS or any professional to discuss their options. They just didn't file.
"Why?" I asked. "Because I was afraid," was the usual answer.
If you've done your tax return and realize you owe but can't pay, the worst thing to do is nothing. You may fear what lies ahead, but eventually the IRS will track you down, and by then the penalties and late fees will make your debt that much larger.
The interest on unpaid tax debts is compounded daily and charged from the due date of the return until payment. The interest rate the IRS charges is the Federal Reserve's benchmark short-term rate plus 3 percent, which currently is 8.25 percent.
Although the IRS doesn't have the storm trooper reputation it once did, the agency hasn't gone SpongeBob-SquarePants-soft. They will come after you hard.
If nothing else, at least file your return even if you can't pay in full or even a partial amount. That's because the total penalty for failure to file and pay can be 47.5 percent (22.5 percent for late filing, 25 percent for late payment) of the tax owed. Filing would at least save you the 22.5 percent portion of the penalty.
At tax time, companies prey on individuals who either have not filed and owe, or have filed and can't pay. These firms promise they can get the IRS to settle your tax debt for a fraction of what you owe.
In most cases, this is deceptive . Essentially what these promoters do is have you apply for what's called an offer in compromise, or OIC. This allows the IRS, under certain circumstances, to accept less than the full tax payment.
An OIC is tough to get. Last year, the IRS received 59,000 requests for offers in compromise, but only 15,000 were granted.
You have to be experiencing some unusual economic hardship to qualify for an offer in compromise. The IRS will not accept one unless what you offer to pay in lieu of your full tax obligation is equal to or greater than what the agency thinks it can reasonably collect from you.
That means you are expected to exhaust all ways to pay your tax bill, including liquidating any assets and bank accounts. You'll have to show that you don't have any real estate, automobiles, or other assets that can be sold. In addition, the IRS will look at your present and future income, less certain amounts allowed for basic living expenses. And among other things, you have to provide detailed financial information to prove that you are practically destitute. You also have to pursue all other payment options, such as paying your full tax obligation in monthly installments .
Instead of contacting one of those promoters promising to get the IRS to cut your tax bill to pennies on the dollar, go through the checklist in IRS Form 656 "Offer in Compromise" to find if you're eligible. This form has all the instructions for submitting an offer, including all of the necessary financial forms. There's also a worksheet which is not too complicated. You can fill it in online at irs.gov and that can help you determine how much you would be expected to offer. Look for the OIC "fill-in format."
Last year, there were some major changes to the OIC program. For example, to be granted an OIC in many cases, you have to make a 20 percent, nonrefundable, upfront payment along with your offer. If you've completed your return and you find you can't pay your tax debt, call 800-829-1040. If you are a small business owner, call 800-829-4933.
If you cannot pay the full amount due, ask to make monthly installment payments. You'll have to pay a one-time fee of $105. In 2006, 2.7 million taxpayers paid their tax bills in monthly payments, according to the IRS. To request an installment agreement, use IRS Form 9465 "Installment Agreement Request" with your return. You should receive a response within 30 days. For more details on installment payments, refer to IRS Tax Topic 202 -- "Tax Payment Options," or Publication 594, "What You Should Know About the IRS Collection Process."
Michelle Singletary is a columnist for The Washington Post. 
