Dissipated Assets

Home  OIC Book Updates  Services  Resources  About Us

Back to Tips, Tricks & Traps Page

A Dissipated Asset is when you dispose of money or property on non-priority debts or expenses instead of paying your tax debt. While for collection purposes the IRS can't do much about it unless they pursue a transferee liability assessment against the recipient, but for Offer purposes it may still considered to be an asset. The IRS may consider that you deliberately excreted assets beyond their reach.  You may want to review your particular situation for any cause that may take priority.

5.8.5.18  (09-30-2013) (these references can be subject to change.)
Dissipation of Assets

1. Inclusion of dissipated assets in the calculation of the reasonable collection potential (RCP) is no longer applicable, except in situations where it can be shown the taxpayer has sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability or used the assets or proceeds (other than wages, salary, or other income) for other than the payment of items necessary for the production of income or the health and welfare of the taxpayer or their family, after the tax has been assessed or within six months prior to the tax assessment.
2. Generally, a three year time frame will be used to determine if it is appropriate to include a dissipated asset in RCP. Include the year of submission as a complete year in the calculation.

Example:

If the offer is submitted in 2018, any asset dissipated prior to 2016 should not be included.

• If the tax liability did not exist prior to the transfer or the transfer occurred prior to the taxable event giving rise to the tax liability, generally, a taxpayer cannot be said to have dissipated the assets in disregard of the outstanding tax liability.
• If a taxpayer withdraws funds from an IRA to invest in a business opportunity but does not have any tax liability prior to the withdrawal, the funds were not dissipated.

Note:

The scope of an offer investigation should not be expanded beyond the requirements defined in IRM 5.8.5.4, Equity in Assets, for the sole purpose of attempting to locate dissipated assets.

3. If it is determined inclusion of a dissipated asset is appropriate and the taxpayer is unwilling or unable to include the value of the dissipated asset in the offer amount, the offer should be rejected as not in the government’s best interest. Although the offer is being rejected under not in the government's best interest criteria, a calculation of an acceptable offer amount based on the equity in assets, the value of future income, and the amount attributable to the dissipated asset(s) should be provided with the rejection recommendation.

Note:

Even if the transfer and/or sale took place more than three years prior to the offer submission, it may be appropriate to include the asset in the calculation of RCP if the asset transfer and/or sale occurred either within six months prior to or within six months after the assessment of the tax liability. If the transfer took place upon notice of or during an examination, these time frames may not apply based on the circumstances of the case. In any instance where the inclusion of a dissipated asset is being considered, a determination on whether the funds were used for health/welfare of the family or production of income would be appropriate

4. See below for examples of the types of situations where it may be appropriate to include, or not include, the value of an asset in the calculation of RCP. The examples provided are not meant to be all inclusive as each case must be evaluated on its own merit.
5. Examples of situations in which the value of an asset should be included in RCP include, but are not limited to:

Note:

Each of the examples in paragraph (5) occurred within three years prior to the offer submission or during the offer investigation, and the taxpayer dissipated the assets after incurring the tax liability, within six months prior to the tax assessment, during an examination, or after receiving notice of an examination.

Example:

(1) The taxpayer dissolved an IRA or other investment account to pay for specific non-priority items, i.e. child's wedding, child's university tuition, extravagant vacation, etc. .

Example:

(2) The taxpayer refinanced their house and used the funds to pay off credit card and non-secured debt. The credit cards were NOT used for payment of necessary living expenses and/or the production of income.

Example:

(3) The taxpayer inherited funds and used the funds for non-priority items (other than health/welfare of the family or production of income).

Example:

(4) The taxpayer closed bank/investment accounts and will not disclose how the funds were spent or if any funds remain.

Example:

(5) A taxpayer filed a CAP to avoid the filing of a NFTL and insisted the lien would impair his credit and his ability to successfully operate his business. After the non-filing was granted, the taxpayer fully encumbered his assets, used the funds for non-priority items (items not necessary for the production of income or the health and welfare of the taxpayer and/or their family) and then submitted an OIC.

Example:

(6) The taxpayer sold real estate and gifted the funds from the sale to family members.

6. Situations may occur in which the transfer happened over 3 years prior to the offer submission, yet because of the timing of the transfer (within six months prior to or six months after the tax assessment or after notification of an examination), the inclusion of the asset in RCP may be appropriate

Example:

The taxpayer filed tax returns for five years (2001 - 2005) in February of 2007, which were assessed in March 2007. In January of 2007, the taxpayer transferred real property to a family member for no consideration. An offer was submitted in January 2012. In this instance, since the transfer was within six months of the tax assessments, it may be appropriate to include the value of the real property in RCP.

Example:

The taxpayer received notification the IRS was beginning an audit of their 2008 tax return in January of 2010. The taxpayer transferred an investment account to a family member in February 2010. Additional tax liabilities based on the audit were assessed in March 2012. An offer was submitted in March 2013. In this instance, since the transfer took place after notification of the audit, it may be appropriate to include the value of the account in RCP.

7. Examples of situations in which the value of an asset should NOT be included in RCP, include but are not limited to: .

Example:

(1) When it can be shown through internal research or substantiation provided by the taxpayer that the funds were needed to provide for necessary living expenses, these amounts should not be included in the RCP calculation.

Example:

(2) Dissolving an IRA during unemployment or underemployment. Review of available internal sources verified the taxpayer’s income was insufficient to meet necessary living expenses. In this case, do not include the funds up to the amount needed to meet allowable expenses in the RCP calculation.

Example:

(3) Substantial amount withdrawn from bank accounts. Taxpayer provided supporting documentation that funds were used to pay for medical or other necessary living expenses. This amount will not be included in the RCP calculation

Example:

(4) Disposing of an asset and using the funds to purchase another asset that is included in the offer evaluation. Do not include the value of the asset disposed of as a dissipated asset.

8. Prior to including the dissipated asset in the RCP, the taxpayer should be contacted (preferably by telephone) and afforded the opportunity to explain or verify the dissipation of the asset.
9. The case history must be clearly documented with the basis for your decision regarding the dissipated asset.

Other Articles: (in process of updating and posting to the web. Available when there is a link.)

Tips, Tricks, and Traps to Avoid

Identifying your income

Compliance Requirements

What Information Is Needed to Complete an OIC Package?

Future Income

Necessary & Allowable Expenses

Collateral Agreements

Annuitizing Assets to Produce Future Income

Contact Us

Copyright © 2001-2022 Gary W. Lundgren, EA  All rights reserved.