Taxpayers without enough liquid assets in April can feel like they are drowning in a sea of income taxes. The Internal Revenue Service might toss these sinkers a lifeline, but they must swallow a lot to survive.

Below are available options, in general terms, for financially strapped taxpayers. In any case, because of many opportunities and pitfalls, it's best to seek the advice of a tax or bankruptcy lawyer when hit by a tidal wave of taxes.

If a financially distressed taxpayer isn't guilty of fraud, hasn't transferred assets to avoid paying taxes and has filed all income tax returns due, three options other than bankruptcy are available:

1. Installment plan. Offer to pay taxes plus interest in installments. Be prepared to prove you can't pay immediately. For example, you don't have stock that can be cashed in.
   
2. Hardship. You may pay less than you owe if payment would cause severe hardship. Examples: Your illness or illness of a dependent is eating up assets; you can't pay living expenses if you pay your taxes; or your assets can't be converted into cash because of unusual circumstance such as an elderly person who can't obtain a home loan.
   
3. Offer in Compromise. You must offer more than the agency can get selling nonexempt assets and taking paychecks for five years after allowing living expenses. The IRS can seize everything and some future income, except tools, furniture, personal effects, professional books.
   

Where do you get the money? How about your brother-in-law or a home equity loan? How about paying in installments out of future income? Once the agency accepts the offer, as part of the deal you must file returns and pay taxes timely for the next five years.

For more information, go to www.taxfables.com and click on IRS Collections.

Bankruptcy has lasting implications and should not be considered lightly or without the advice of an attorney. For one thing, it adversely affects your ability to get credit. If you conceal assets, give false information to the court or give assets away to defeat the rights of creditors, your debts won't be discharged. To your advantage, interest and penalties generally stop accruing, and IRS collection efforts stop while the bankruptcy proceeds.

Bankruptcy doesn't remove all debts and stop all creditors:

• It doesn't discharge fines, alimony, child support, student loans.
  
• It doesn't remove all tax obligations. A tax or bankruptcy attorney can tell you which of yours, if any, won't be discharged.
  
• It doesn't release most liens. Lien holders, like banks with car loans or home mortgages, can foreclose on collateral if payments are not kept current.
  

In bankruptcy, you can keep some assets. Which ones depend on the state where you live and sometimes on federal law. In most states clothing, personal effects, furniture, appliances and household goods are exempt. Generally, public benefits such as Social Security, unemployment compensation and veterans benefits are also exempt.

The two most common bankruptcies for individuals are Chapter 13 and Chapter 7.

1. Chapter 13 Bankruptcy. This works something like an Offer in Compromise but involves all creditors. The court decides how much you pay for up to five years.
   
2. Chapter 7 Bankruptcy. This is better than Chapter 13 if you have few assets. Here you give all assets except exempt ones to the court, and it sells them to pay creditors.
   

(more at IRS Collections)

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Released 3-18-02