What to do if you’ve ignored a bill from the IRS

Past due stamped on envelope

You're at the point of no return.

You shoved all those letters and notices from the Internal Revenue Service into the back of a drawer. You didn't call. You didn't write. You didn't go to your local tax office.

We won't lie to you: You're in a bad spot, and the IRS is moving in. It may have garnisheed your wages, seized your savings, taken your car or filed a lien against your home.

It might even be threatening to haul you into court to assess your ability to pay your mounting tax bill, though it can't arrest you unless you've been fraudulent in reporting your taxable income and assets.

Here's how to salvage the situation:

First, do what you should have done a long time ago: Contact the IRS. Going in person to the nearest office is your best bet. Coming clean, even at this late date, is better than losing everything.

Look at how much of the bill you can cover by tapping your savings, securing a home equity loan or borrowing money from family or friends.

Even if you can't pay the entire bill at once, the more you put down, the less you'll have to pay in interest and penalties. And it will show the IRS that you're ready and willing to work out your problems.

You can ask for an Installment Agreement that allows you to repay the rest though regular monthly payments. If you owe less than $25,000, you can set up a payment plan online or fill out an Installment Agreement Request (Form 9465).

At this point, the IRS also might require you to fill out a Collection Information Statement (Form 433-F), which is the IRS' way of determining how much you can afford to pay a month.

You might not be happy with how much the IRS says you can afford because it will consider everything, even how much you could save by selling your house and moving to an apartment where the rent is less than your mortgage payment.

Prepare to live on a tight budget.

If the tax bill is so big you can't possibly repay it, make an Offer in Compromise (Form 656), which asks the IRS to forgive part of your debt.

If your compromise is accepted, you'll have to:

Fail to do any of these things and the IRS can -- and almost certainly will -- cancel the deal and come after you for the full amount.

If an Offer in Compromise doesn't work, bankruptcy is your final alternative.

Filing for bankruptcy can lessen your debt, erase it or buy you five years in which to pay it back without accruing interest and penalties.

But to qualify for any kind of relief, your tax debt must be more than three years old and you must show that you tried to reach an agreement with the IRS.

If you need an attorney and think you might qualify for free legal aid, go to www.findlaw.com to locate help in your area.

If not, you'll want to hire a bankruptcy lawyer, which will cost anywhere from $2,000 to $5,000, depending on the complexity of your case and where you live. Many attorneys will accept a modest down payment and the balance over time.

To find an attorney who knows consumer bankruptcy law, go to the American Board of Certification, a nonprofit group that tests and accredits bankruptcy lawyers.

Hiring professional help is expensive. But don't try to file for bankruptcy on your own. If you make a mistake, the court will toss your case and you won't be able to refile for six months, even if you hire a lawyer.