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Can't pay taxes on time? IRS is in a dealmaking mood

It happens. Many people simply can't afford to pay their tax bills on time. In the past, the IRS' attitude has been to pursue every penny owed regardless of the toll on the taxpayer. The IRS is still the nation's most dreaded and relentless bill collector, but it is becoming more practical and businesslike and is increasingly willing to cut a deal.

One option: Pay in installments.

Partly to speed up collections and partly on the theory that taxpayers are more likely to pay their bills when they set their own terms, the IRS lets taxpayers propose payment plans when they file their return. The IRS will rule on your plan within 30 days _ and it generally will accept your terms if you're reasonable.

To propose a payment plan, submit the simple one-page Form 9465 with your tax return, visit a full-service IRS office or call (800) 829-1040. You must owe less than $10,000, offer to pay within 36 months, pay on time and remain cooperative. The IRS no longer requires a financial statement, nor will it file a tax lien that could taint your credit record for years. But you'll still owe interest and late-payment charges on the unpaid balance.

The IRS charges a $43 user fee when it accepts an installment plan, $24 if you later revise the terms. If you owe more than $10,000 or can't pay within 36 months, the IRS still will consider an installment agreement. But it will investigate your financial condition much more thoroughly.

Tip 1: File your IRS return even if you know you can't pay immediately. Failing to file triggers a hefty penalty.

Tip 2: Don't wait for the IRS to approve your installment proposal before you start chipping away at your bill. You'll only accrue interest charges during the weeks it takes the IRS to process such plans. If you pay off your bill before the IRS accepts your plan, the IRS will waive the $43 user fee.

If you want immediate IRS approval of your proposal, the agency usually will approve it on the spot if you submit it in person at an IRS counter.

Tip 3: If you already are in an installment agreement and can't pay your 1996 bill either, immediately phone the number on your IRS notices to work out a new deal.

Another option: Cut a deal.

Under pressure from Congress to collect delinquent tax bills and fearing more taxpayers would go underground, the IRS in 1992 ordered its agents to look for compromises. The "offer in compromise" program is not for taxpayers simply looking to duck a bill. Participating could mean selling your home to cash out equity, tightening your lifestyle substantially or borrowing from relatives.

To qualify to cut a deal, the IRS must either agree that you're not legally or personally liable for the tax or it's unlikely you could ever pay.

After that it will audit your financial statement and apply fairly rigid rules about what it can settle for.

The IRS also will effectively put you on probation by requiring you to file tax returns and pay your tax bills on time for the next five years.