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Offer in Compromise - Dissipated Assets
During an Offer in Compromise investigation, the objective of the Internal Revenue Service (IRS) is to determine the taxpayer’s “Reasonable Collection Potential” (RCP). The RCP is the maximum amount that the IRS believes it can collect from a taxpayer to apply towards their tax liability. A taxpayer’s RCP includes his future ability to pay. It is also commonly known that the IRS investigates the applicant’s ability to liquidate or sell any assets. However, what few people understand is that one’s RCP for purposes of an Offer in Compromise can also include money and/or assets that the applicant no longer has and that no longer exists.
Dissipated assets are those that “(liquid or non-liquid) have been sold, gifted, transferred, or spent on non-priority items and/or debts and are no longer available to pay the tax liability.” (Internal Revenue Manual 5.8.5.4(1).) The rationale is that, at one time the asset or funds were available, and they should have been used to pay off (or partially pay off) the IRS.
Of course, if the asset was sold, gifted, transferred, or spent on non-priority items and/or debts prior to the existence of the IRS tax debt, then it cannot be considered a dissipated asset and cannot be included in the RCP or in the Offer in Compromise. For example, assume that a taxpayer liquidates his 401k in order to fund a vacation in 2003. If the back tax liability was from tax year 2000, then the amount liquidated would be included in the Offer in Compromise. But the 401k disbursement would not be included in the Offer in Compromise if the back tax liability was from tax year 2005.
Even if the asset was sold, gifted, transferred, or spent after incurring the tax liability, its value should not be included in the RCP and, therefore, should not be included in the Offer in Compromise amount if the asset was dissipated to provide for “necessary living expenses.” Necessary living expenses are those incurred to provide oneself with shelter, food, medical care and other basic needs.
Furthermore, even if the Offer in Compromise investigation reveals that an asset was dissipated without regard for the tax liability, and not for the purpose of providing for necessary living expenses, it should not be automatically included in the Offer in Compromise. The IRS has discretion to exclude it, or exclude a portion of it, from the RCP. (Internal Revenue Manual 5.8.5.4.) All the facts and circumstances of each particular case should be carefully considered.
Related Links
- IRS Offer in Compromise
- Offer in Compromise – Living Standards Guidelines
- Getting Help With IRS Tax Problems
Source: RoniDeutch.com
