The IRS offers several programs to taxpayers with past-due federal income tax liabilities. The purpose of these various programs is to offer different ways for taxpayers to resolve there tax liabilities based on their unique financial situation. Perhaps the best known of these programs is the Offer in Compromise (“OIC”). The OIC program allows certain taxpayers to settle their liability for less then the amount of tax they owe. This program has certain specific criteria which must be meet before an OIC will be accepted.
Before it accepts an OIC, the IRS will take a very close look at the taxpayer’s financial history. During this investigation, the IRS often discovers issues that may cause it to reject the OIC. One such issue is the existence of dissipated assets. This issue arises when a taxpayer sells, spends or otherwise disposes of an asset that they could have used to pay their tax liability. When this occurs, the IRS will often reject the OIC, or demand that the amount offered increase to include the amount of the dissipated asset. Dissipated assets usually occur when the asset is disposed of after the tax liability accrues.
For example, a taxpayer accumulated a tax liability of $20,000 in 2001. In the following year, 2002, that same taxpayer won $10,000 in the state lottery. The taxpayer then proceeded to spend those funds on various expense, entertainment, home electronics, etc. However, they did not use any of the lottery winnings to pay their IRS tax liability. In this case, the IRS would consider the taxpayer to have dissipated assets of $10,000. They would most likely not accept an OIC for any less then $10,000.
In most cases, if the asset is dissipated before the taxpayer had a liability, this issue will not cause a problem. If a portion of the funds were spent on emergency issues such as healthcare, the IRS may agree to accept an offer for less then the amount of the dissipated asset. However, the IRS will require the taxpayer to produce documents proving that the money was spent on the emergency needs.
Gambling winnings, retirement accounts, funds from a home sale or refinance and inheritances also commonly appear as dissipated assets.
This issue is one of the many types of problems that can arise while attempting to negotiate an Offer in Compromise with the Internal Revenue Service. This is just one example of why it is important to investigate all of your options when trying to determine the best strategy for resolving your tax liability. A tax professional may be able to help you determine the best strategy for you based on your unique financial situation.