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 . In order to qualify, a taxpayer must be able to prove that their income and assets are not enough to cover their outstanding tax liabilities during the reasonable collection potential (RCP) period as calculated by the IRS. If the IRS foresees that a taxpayer has a RCP, it will lower the chances of OIC qualification, making it very important to calculate the RCP accurately. To calculate a taxpayer’s RCP, the IRS looks at current asset value and potential earnings. The IRS also allows certain allowable necessary living expenses. If a taxpayer goes beyond those allowable expenses, there is leftover income that the IRS will see as giving the taxpayer an ability to pay the outstanding tax bill. The total asset and income figure is used to show the amounts available to pay off any IRS back taxes due.
Disposing of Assets
Taxpayers wrongfully assume they can just dispose of their assets and that the IRS will not notice (called “dissipation of assets”). It is a natural temptation to attempt to spend down assets, but this will only bring you more pain and difficulty. The IRS is looking out for this exact behavior and will punish taxpayer’s accordingly. This plan rarely works in the hopes of qualifying for an offer in compromise. In fact, there are several court cases that the IRS looks to that include the dissipation of assets in the RCP calculation.
The definition of 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: (1) transferring funds into an online brokerage account to day trade and losing the money needed to pay off the outstanding tax liability; and (2) 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 22.214.171.124:
- Time of asset dissipation in relation to submitting an OIC (as a general rule, if more than 5 years has passed at asset dissipation and OIC submission, it will not be added into the RCP calculation)
- 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
- How funds from the asset disposition was 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 San Diego tax attorney can assist you in resolving your IRS tax problems and ensure that you remain compliant with your taxes. The San Diego Tax 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 at (619) 639-3336. We look forward to helping you.
This blog post is not intended as legal advice and should be considered general information only.