Dissipated Assets – How They Affect Your OIC
When considering an offer in compromise, the IRS must consider the taxpayer’s “Reasonable Collection Potential”. This is the amount that the IRS feels is the most they can collect from the taxpayer. This amount is a multiple of the income, less allowable expenses, plus equity in assets. The IRS feels that sometimes the taxpayer had assets to pay the taxes, and instead spent it on something else. The IRS will then add that amount to the offer.
What Are Dissipated Assets?
Assets sold, transferred, gifted, or spent on items that are not necessary living expenses after a tax liability exists are considered dissipated assets. The dissipation must have taken place when there existed a liability or in contemplation of one.
I had a case where the taxpayer received about $15,000 from closing on the sale of his second house. He used the money as start up costs for a business that was a second job. He was attempting to make money to pay off his tax liabilities. The IRS considered that money to be a dissipated asset and added it in the offer amount.
Should Dissipated Assets be Included in Your Offer?
The IRS may add dissipated assets to your offer amount. To the extent that you can show that the assets were used for necessary living expenses, the dissipated asset amount may be lowered. The IRS has tables to show necessary living expense allowances. The IRS always has discretion in any of their negotiations. It is important to present your best arguments. This information is covered in the Internal Revenue Manual section 5.8.5.4. You probably want to consider our services in this area of representation.
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