An Offer in Compromise (OIC) can be a lifeline for taxpayers struggling with IRS debt. According to IRC § 7122(a), the IRS allows a taxpayer the ability to apply for an offer in compromise (OIC) or IRS settlement allowing them IRS tax relief for their tax debt, for less than the total tax amount owed. But the IRS only approves these offers under certain conditions. The key factor? Your “reasonable collection potential” (RCP).
RCP is the IRS’s estimate of how much you could realistically pay based on the value of your assets and your future income. They also allow certain necessary living expenses, but if your spending goes beyond those limits, the IRS will view the extra funds as money you could use to pay your taxes. The higher your RCP, the harder it is to get an OIC approved—so calculating it accurately is critical.
Disposing of Assets
Some taxpayers think they can get around the rules by selling, transferring, or using up assets before applying for an OIC. This is known as “dissipation of assets,” and the IRS watches for it closely. While it might seem like a clever move, it often backfires—sometimes leading to your offer being rejected.
A dissipated asset is any asset sold, transferred or used to purchase non-priority items or debts making the assets no longer available to pay off the outstanding IRS tax debt. Some examples of actions taken by a taxpayer considered a non-allowable dissipation of asset transfer include:
- Transferring funds into an online brokerage account to day trade and losing the money needed to pay off the outstanding tax liability
- Liquidating an IRA account to aid the taxpayer in paying necessary living expenses while unemployed, and at the same time, using the remaining balance of IRA distributions to pay non-essential debts not considered necessary living expenses.
Dissipation of Asset Guidelines
The following are IRS guidelines used to determine whether an asset has been dissipated causing it to be included in the RCP, according Internal Revenue Manual section 5.8.5.16:
- How much time has passed between getting rid of the asset and submitting your OIC (generally, if it’s been over five years, it’s not counted).
- An asset is not considered dissipated if it was used to pay current, ongoing business operating expenses.
- Time of asset disposition is relation to the tax debt
- The way the asset was transferred
- Whether any funds were realized by the taxpayer due to the asset transfer, In other words, if you received money from the transfer.
- How funds from the asset disposition were realized and
- Asset value the taxpayer’s interest in them.
Find the best IRS tax attorney for IRS tax help. One of the main objectives in qualifying for an offer in compromise is keeping a watchful eye on a taxpayer’s dissipation of assets and accurately calculating the RCP. A vigilant tax attorney can assist you in resolving your IRS tax problems and ensure that you remain compliant with your taxes. The Attorneys at Delia Law have many years of tax debt relief experience and will aggressively represent you before the IRS. Please call for a no-cost tax attorney consultation. We look forward to helping you.
This blog post is not intended as legal advice and should be considered general information only.
