I am joint owner of a small business with my wife and need some
direction or possibly just clarification with regards to our taxes. I
should clarify that I am simply trying to arm myself with enough
information to make a sound decision. I have been in business for
eight years and have not filed taxes for seven of those years. I have
not been contacted by the state or federal IRS, however, I do not wish
to continue spiraling down hill. I have been given a lot of advice as
to how I should proceed but have narrowed it down to two options.
First, I need to explain that my company is now all but debunked do to
undforseen economic effects of post 9-11-01 hemorrhaging. I have
little financial resources to mount a full scale repair so I need to
be clear and decisive.
 The first avenue is to personally contact the IRS and level with them
and let the cards fall where they may. I have been told (by no one who
is an authority on the matter) if I contact the IRS first, they will
be more lenient or at least more willing to work favorably with us. I
am leery of this for obvious reasons. Has the IRS really softened its
aggressive nature for those who seek help from them to resolve past
debt?
 The second option is to get my books in order, then contact a legal
firm who specializes in tax relief. Two problems arise with this
approach.
  1. It would take all if not more money than I have. 
  2. I do not know who to contact for this kind of help.
Can a law firm realistically arbitrate considerably more favorable
terms than than the IRS would volunteer? Please read the following
information for possible clarification.
 Basically I am afraid of falling victim to the old saying "only a
fool represents himself". Is one of the above options better and/or
safer than the other or is there another avenue I should look into?
Who are possible sources I could contact for help? For the record (if
it helps) I am permanently partially physically disabled and have no
feasible alternatives, at this time, to subsidize my income. Also, I
have very little if any real property the IRS could or would seize.
For the record: I am not asking for legal counsel just an educated
opinion of my question from a qualified source. I accept full
responsibility for my own decisions and actions with regards to my
company, question, and answer.
Thank you for your consideration of this question, it is the first one
I have posted with Google.

you may benefit from reading alternet's article on war tax resistance
( http://www.alternet.org/story.html?StoryID=15593 ). though you are
not protesting a war, bear with me.

You have said that for 7 of the last 8 years you have not filed for
taxes for your business and have not been noticed by the IRS. This is
good. I'm not sure exactly why you are considering only the two
options above now, since from how I hear of it, your tax situation is
not much different than it ever was.

In this light, I paste a quote from the article I mentioned:

"Do You Fear the Tax Man? 


When it comes right down to it, much of the IRS's power comes from
fear – the fear accrued by hyping their ability to find you, pin you
down, take your money, and send you off to prison.


The reality is that the IRS is chronically underfunded, faces a
mountain of work for a relatively small staff, and even when tax
evaders are caught, prison is rarely the result. When deciding to
become a war tax resister, if you are committed to the effort, do some
planning for the eventuality of tax collection and join a community of
resisters, the biggest threat you face will be the worry of when
they'll catch on to you, and not what you'll do when that happens. "

Now, I don't want to say to you that you have nothing to worry about,
nor do I wish to say that you should go on not paying taxes
necessarily. I am simply trying to say that it does not sound like you
have considered your options fully. Clearly things are going pretty
poorly for you in general right now, and though I may be wrong, it
doesn't seem clear why "things are spiraling downhill" with regards to
your tax situation.

From where I'm standing, option one (coming clean to the irs without
consulting anyone first) seems like a mistake. The second option you
mentioned might be your best bet, if you can afford it.

In any case, I wish you the best of luck, and hopefully a researcher
more versed in these matters can give you some solid advice.

I'm going to disagree with the advice given in the previous comment.
  If the IRS finds you before you "find" them, there is a real
possibility you will find yourself subjected to criminal prosecution. 
And by the way, although the IRS has somewhat limited resources on the
civil side, they have lots of resources for criminal prosecutions,
most of which are borne by the federal prosecutors who are on a
different budget line anyway.  And the personnel of the IRS CID
(Criminal Investigation Division) are serious people--you'll know them
because the first time you meet them they'll start the conversation by
reading you your Miranda rights.
  But if you bring your case to the IRS first, it is extremely
unlikely that your case will be referred for criminal action.  So yes,
you need to bring yourself to the attention of the IRS civil folks
because the "fear" referred to in the previous comment is a
well-founded fear.

  However, bringing your case to the IRS does not mean letting the
"cards fall where they may."  It means:
   1.  Preparing income tax returns for all the past years and making
sure not to overlook all the deductions and exemptions you were
entitled to.  You see, if the IRS prepares your returns for you, they
will construct your income in a way most favorable to them, which
means making outlandish assumptions about how much income you earned,
and generally overlooking all your expenses which stand to offset that
income.  So you've got to prepare those returns now, and unless you're
capable of doing business returns yourself, you need to get yourself
to an accountant who can reconstruct all your past income _and
expenses_and_deductions and prepare the past due returns.  Do this
before you contact the IRS, but do it soon!
   2.  If your current economic situation is as bad as you say, you
may also qualify for an offer in compromise after you get your returns
filed.  This is a very technical subject and it's the main reason I've
not attempted to answer your question above although I am a Google
Answers Researcher. Suffice to say that if your liabilities including
tax liabilities exceed your assets, the IRS has the authority to
accept a negotiated settlement and write off the balance of your debt
[this is an especially good deal if you qualify because but for this
option you can find yourself going bankrupt and then still owing all
the taxes, because tax obligations are generally not expunged in
bankruptcy].

So as to the crux of your question, should you go it alone or first
get help and then apporach the IRS, obviously you should get all the
help you can afford to pay for, whatever that is.  But either way, the
two choices as stated in your question are the proper choices.  This
is not a situation that you should ignore any longer, and your fear of
the cost of doing nothing is well-founded.

Sincerely,
Richard-ga