It is hard to pay your taxes when you're trying to make ends meet.
In the first place, no matter what your financial situation, always file your taxes. If you can't pay the full amount, pay what you can, but still file your tax returns. Otherwise, interest and penalties will compound, and late filing charges will be assessed.
If you can't pay the full amount when you file, you can ask to pay in installments. That is done by filing Form 9465, Installment Agreement Request. If you owe $10,000 or less and will pay off the debt in full within three years, your request will be granted. Otherwise, you need to contact the IRS and file another form, 433-A, Collection Information Statement for Individuals. The IRS will then either let you pay in installments or tell you to sell some of your assets to pay off the debt.
If you owe $25,000 or less in combined tax, penalties, and interest, you can use the Online Payment Agreement (OPA) Application to request a payment agreement. This application will allow you or your authorized representative (power of attorney) to self-qualify, apply for an installment agreement, and receive immediate notification of approval. There may be times when you will need to mail in paperwork or speak with the IRS before they can determine your eligibility for an installment agreement. If that is the case, the OPA application will give you an address or a toll-free phone number to reach the IRS.
On rare occasions, the IRS will accept an Offer in Compromise (Form 656), which is an offer to satisfy your debt with a partial payment. If the tax liabilities can be fully paid through an installment agreement or other means, you will in most cases not be eligible for an OIC. You fill out a form that states your reason for not being able to pay the full amount. You must provide a financial statement. The IRS will look very carefully at your reasons and at your statement. If it is accepted, it may be under the condition that you will have to pay more if your financial condition improves.
Whether you have worked out an arrangement or not, your taxes should be your first priority in payment of debt. You can't go to prison for leaving your credit cards unpaid (unless you committed an illegal act in doing so), but you can go to prison for nonpayment of taxes.
Generally, all income taxes, both Federal and State taxes may be discharged in bankruptcy if they are old enough. In the case of the income taxes, they are dischargeable in Chapter 7 if all of the following criteria are met.
For more information on tax obligations and bankruptcy, see www.irsproblem.org.