It is much better to file a tax return you are unemployed and can't pay than not to file at all. If you don't file, your tax debt will be just as big, and the penalties can be up to 25 percent of the debt. The debt won't go away, either. Normally the IRS can't look at tax returns older than three years, but that clock only starts ticking after you file the return.
The IRS cannot jail you for not paying your taxes, but it can have you locked up for not filing. In practice, that rarely happens, the Back Taxes Help website states, unless you're a high-profile case and the government wants to make an example of you. What can happen is that the IRS files a substitute return based on the information it has about you -- which may not include all the deductions you're entitled to -- and then adds on penalties.
If you can't pay your taxes when you file, tell the IRS your situation. You can work out a payment plan or ask the agency to let you defer payment until your situation improves. The IRS will, however, keep charging you interest as long as there's an outstanding debt. If you have a low-interest credit card, the IRS states, you might be better off paying your tax debt immediately rather than letting the IRS charge you interest.
Offer in Compromise
If you're really in a tight spot, the IRS may accept an offer in compromise, an agreement to let you off with only a partial payment. The IRS will only agree to this if it decides you don't have the financial resources -- including your house and other assets -- to pay more. The three grounds for accepting an offer of compromise are that the agency can't collect the full debt, there's doubt of how much you really owe or there are extenuating circumstances, such as you needing money to care for a sick child.
Bankruptcy has limited power to wipe out income-tax debts, but it can sometimes be useful, the Nolo legal website states. If the debt is more than three years old, you filed the relevant tax debt at least two years ago and the IRS assessed the debt more than 240 days ago, or hasn't assessed it yet, you can discharge the debt by filing bankruptcy. Once the debt is discharged, you're free and clear; if the IRS has filed a lien on your property, however, bankruptcy cannot wipe that out.