There are options available if you can't pay the IRS what you owe.

It's everyone's worst nightmare - you owe the Internal Revenue Service and you just can't pay the bill. What do you do? Your best strategy is to respond promptly and let the IRS know your situation. If you can't satisfy your tax debt, you may be able to get IRS approval to set up an installment plan, a delay in payment or a compromise settlement. Since unpaid tax bills accrue both failure-to-pay penalties and interest, it's in your best interest to consider all your personal sources of financing before running up a debt with the IRS.

Since unpaid bills accrue both failure-to-pay penalties and interest, it's in your best interest to consider all your personal sources of financing before running up a debt with the IRs. Check all of your investments along with their rates of return to identify those that could readily be turned into cash.

Most 401(k) and some Keogh and pension plans permit you to borrow against your retirement funds. There are strict limits on how much you can borrow and, if you leave your job with an outstanding loan, you'll have to repay it immediately or have the loan treated as a distribution subject to income tax and penalty.

You can't borrow from an Individual Retirement Account, but you can use the money for a very brief period. Tax law allows you to withdraw money once a year from your IRA without tax consequences as long as you redeposit the funds into an IRA within 60 days of taking them out. Caution: if you miss the 60-day deadline, the money you withdraw is subject to income tax and a 10-percent premature withdrawal penalty if you're under age 59 1/2.

In many cases, the IRS allows payment plans, generally based on monthly installments. To request an installment plan, you must complete Form 9465, Installment Agreement Request, or prepare your own written statement indicating the amount you propose to pay each month and the payment date. It's wise to pay off the total as soon as possible so you can minimize interest and late-penalty charges. The IRS will notify you, usually within 30 days, that it has approved or denied your request, or that it needs more information.

If you negotiate an agreement with the IRS, be sure to keep your end of the bargain. If you find that you can't make the agreed-upon payments, notify the IRS immediately so you can explain the situation and work out a new plan.

What if you think there's no way you'll ever be able to pay all that you owe the IRS? Believe it or not, the IRS sometimes accepts partial payment. You can try making an "offer in compromise," an IRS procedure that authorizes the IRS to settle tax debts for less than the total amount owed when doubt exists as to whether the total liability can ever be collected.

First, you'll need to complete Form 656, Offer in Compromise, which asks you to determine: (a) the most you think you can pay in relation to your net worth and income; and (b) how you intend to pay it - cash up front and/or by payments within a relatively short period of time. Your initial offer should be a good faith figure - don't make your offer so low that the IRS will consider it frivolous. You'll also have to submit Form 433A, Statement of Financial Condition, which provides a detailed description of your income, expenses, assets, and liabilities.

Be prepared to establish "beyond a reasonable doubt" that you don't have the resources to pay off what you owe. If it appears that you can pay the debt, your offer will be rejected and you will just postpone the time when you have to pay the full bill. Meanwhile, penalties and interest can mount. Bear in mind that an offer in compromise, if accepted, may come with strings attached. For example, the IRS may ask for a share of your future earnings.

Poteshman, a C.P.A., is executive vice president of Leonard Nadler Associates. Inc., a Los Angeles-based real estate brokerage and advisory firm