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Since I don't have that kind of money sitting around, do you guys have any suggestions beyond asking for an installment agreement and hoping it gets approved?

File the returns on time, with whatever payment you can scrape together. There are penalties for late filing as well as late payment. You may as well do your best to keep from making the problem worse by avoiding unnecessary penalties.

The IRS is actually pretty good about accepting an installment agreement, especially if your proposed payments will pay off the debt in less than one year.

California is not as easy to work with as the IRS. They are very quick to use garnishments to collect their taxes. They will also accept installment agreements, but they are not as quick to do so as the IRS. I'd work toward getting them paid off as quickly as possible.

Listen to Phil's advice about putting money aside for this year's taxes. Keeping up with current taxes is a standard requirement of any installment agreement you reach with the agencies. You can very quickly spiral downhill if you don't address this problem. Although estimated taxes are only due 4 times a year, I have sometimes suggested to clients that they make monthly or even more frequent estimated tax payments. Both the IRS and California will accept your estimated tax payments as often as you care to send them in.

--Peter
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