What Tax Debt Means to You Personally

Many people are afraid of the IRS because they hear stories about people going to jail for owing taxes. Those stories represent a very small fraction of the people who owe back taxes and usually involve fraud that goes beyond simply not paying your federal taxes. The IRS itself does not send people to jail; it can recommend that a case be prosecuted, and if that happens, federal prosecutors will get involved.

That’s what happened to Alex and Kay Council, who owned a home building company in Winston-Salem, North Carolina when the IRS notified them in 1983 that they owed $183,021 in taxes, penalties, and interest from their 1979 return—a figure that steadily increased over the years as the Councils attempted to deal with the bureaucratic jungle that was the IRS at the time.

The case went to court in October 1988; after a nonjury trial, the judge found against the IRS and ordered the agency to drop its collection efforts and cancel the tax lien for $284,718 it had filed in 1987 against all of the Councils’ assets. It was a victory Alex Council didn’t see. In June 1988, crushed by the battle and seeing no other way, Alex killed himself to make funds available to Kay from his suicide-proof life insurance policy.

In his suicide note, he wrote, “The IRS and its liens which have been taken against our property illegally by a runaway agency of our government have dried up all sources of credit for us. So I have made the only decision I can.”

Much has changed at the IRS since that tragedy, including the creation of the Taxpayer Bill of Rights and the Taxpayer Advocate Service and the general structure of the agency through the IRS Restructuring and Reform Act of 1998.

Today’s IRS consists of two primary divisions: one that assesses taxes and one that collects them. The assessment division is part of the IRS that receives your tax returns and will also prepare them for you if you request it or if you fail to file your returns yourself, and then assesses what you owe. The compliance division is the one that processes form 5500-EZ.

At this point, if you do not agree with the assessment, you have the right to a due process collection hearing to argue your case before enforced collections begin. If the IRS doesn’t accept your position or if you do not respond to the assessment notice and you do not pay the tax due, the file moves over to the collections side. Most taxpayers deal with the assessment side of the IRS once a year by filing their tax forms and they rarely have any other interactions with the IRS. My firm deals primarily with the collections side, because that’s the point at which our clients need help.