Sunday

Prision Time if you Owe Back Taxes to the IRS?


Will the police or sheriff come knocking on my door if I owe back taxes to the IRS?  This is a question I am frequently asked by clients and potential clients who owe back taxes to the IRS and/or State Tax Collection Agencies.  Fortunately, just by owing taxes or failing to file your tax returns will not land you in jail (unless you are taken to court and found guilty of fraud or in contempt of court).

The theory behind jailing debtors was that the threat of incarceration might persuade them to reveal hidden assets.  Or their families might take pity and pay their ransom.  But if the debtor was truly penniless, he could be sentenced to what amounted to life in prison.  Unlike murders, rapists, and thieves, the debtors were also responsible for paying their own upkeep, thus putting them even further into debt...

The colonies gradually developed more forgiving laws on debt, recognizing that owing money could be the result of bad luck rather than evidence of fraud or indolence.  "crops fail, prices fall, ships sink, warehouses burn, owners die, partners steal, pirates pillage, wars ravage, and people simply make mistakes," wrote Bruce Mann in his 2002 book Republic of Debtors.  "Failure was the down side of entrepreneurial risk.  This made failure the potential common fate of all merchants."...

Colonial lawmakers began taking a more charitable view toward debtors, but they were likelier to excuse a rich defaulter than a poor one ...Indeed, when some large speculative financial schemes collapsed after the Revolutionary War, many wealthy men were suddenly bankrupt.  One of them, Robert Morris who had signed the Declaration of Independence and provided critical financing for the war, lost his fortune speculating on land.  Sentenced to debtors' prison in Philadelphia, Morris rented a best room in the jail and outfitted it with a settee, writing desks, and bed, an trunk of clothes and other comforts of home.

However lavishly they could outfit their prison cells, though, rich and poor faced the same dim future.  There was no way an insolvent could get a fresh start-the "holy grail of debt relief," as Mr. Mann put it.  In prison or out, debtors were expected to repay every penny they owned their creditors, even if it took them the rest of their lives...

Congress passed a bankruptcy law in 1800 but then repealed it three years later.  Not until 1831 did New York abolish prison for most debtors; Pennsylvania kept its debtors' prisons open until 1842.

If you have tax debt issues call me and I will work with you to resolve them!