But some unemployed taxpayers may catch a break under the IRS’s new, more flexible program to settle tax debts for less than owed. By Mary Beth Franklin, Senior Editor March 31, 2010 Times are tough all over, especially for millions of Americans who are unemployed or facing other financial difficulties triggered by one of the worst recessions in memory. With the deadline for filing your 2009 tax return fast approaching, it may be harder than usual this year to find the cash to pay Uncle Sam.Pay what you can. If you owe taxes and can’t cover the whole bill, pay as much as you can when you file your return. That will reduce the penalties and interest that will continue to mount up until the balance is paid in full. (No penalties will be applied if you’ve paid at least 90% of the total tax bill by the April 15 deadlines, but interest will still accrue.) Sponsored Content Then wait for the IRS to send you a bill for the balance. That should give you some time to come up with the cash. If you still can't afford to pay the full balance, pay what you can to buy yourself an additional month or two until another bill arrives. File an extension. Or, if you act by April 15, you can file for an extension by using Form 4868 (electronically or by mail) to delay your tax-filing deadline by six months, until October 15. But an extension doesn't change the deadline for paying your taxes. You'll still incur interest charges and start racking up late-payment penalties of 0.5% a month on the unpaid amount, up to 25% of the balance, plus interest. Advertisement The installment plan. If you can't pay your taxes, contact the IRS at 800-829-1040 to discuss your payment options. You may be able to set up an installment plan if your tax debt is $25,000 or less and you are able to pay your bill within five years. File Form 9465, Installment Agreement Request, to set up an agreement. If your request is approved, the IRS will charge a set-up fee of $105 or $52 if you agree to make payments through direct debits from your bank account. Cut a deal. In an extreme case, you may be able to file an Offer in Compromise and settle your tax debt for far less than you owe, if you can prove you don't have the means to pay and it is very unlikely that you ever will. And believe it or not, the nation’s top tax collector has a heart. “The IRS wants to do everything it can to help people who have lost their job or face financial strain,” says IRS Commissioner Doug Shulman. “We continue to make adjustments to key programs and expand the ways for people to get help.” IRS employees now have additional flexibility when considering Offers in Compromise from taxpayers facing economic troubles, including recent unemployment. Specifically, IRS employees will be permitted to take into account a taxpayer’s current income and potential for future income when negotiating an Offer in Compromise. Normally, offers are based on a taxpayer’s past earnings. Advertisement And, the IRS is working with state departments of revenue to help taxpayers, particularly the unemployed, who are having problems paying their taxes. It has also set up the Tax Center to Assist Unemployed Taxpayers with links to information on tax assistance and relief for struggling taxpayers. Bottom line: If you can't pay your taxes, denial and delay only make a bad situation worse. Ignore it and you could eventually face some nasty collection procedures in which the IRS imposes a levy on your wages or bank accounts, or places a federal tax lien against your property.