Getting out of an IRS mess.

Q I owe more than $20,000 in back taxes. I have been looking to do an installment agreement, but I also wanted to know if I could do an offer in compromise. What's the best way to go?

--Anonymous

Via the Internet

A First pay as much as you can toward your tax bill, since any outstanding balance will continue to incur interest (the federal short-term rate plus 3%, compounded daily) and penalties.

With an Installment Agreement (Form 9465), the IRS will take monthly payments. You choose the amount and due date, however, you must provide financial documentation showing you can't pay what you owe in a lump sum. Once the IRS accepts your plan, you must pay every month, on time. If you miss a payment or have outstanding unpaid taxes in a future year, you will be in default and the IRS could take action to collect the entire amount owed.

There are alternatives. Consider borrowing against your 401(k) or against equity in other assets, such as your house. Or you can liquidate assets such as stocks or bonds.

An Offer in Compromise (Form 656) is an agreement with the IRS that lets you resolve your tax bill for less than you owe; the general rule is at least 14% of the amount owed must be paid. The IRS is more likely to consider such an offer after all other payment options have been exhausted. Since full disclosure is required, the government will find out every detail of your finances.

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