When taxpayers (or their representatives) file and offer in compromise (OIC), they have usually calculated the reasonable collection potential (RCP) based upon the taxpayer’s assets and their monthly income and expenses. Chances are they never considered including assets the taxpayer no longer owned.
What is a “Dissipated Asset”?
At Convicer & Percy, LLP, we focus on taxpayer representation for Connecticut and Western Massachusetts. Though Dissipated Assets are nothing new the IRS, in a renewed effort to increase collection and reduce the tax gap, are focusing more on the issue of dissipated assets when evaluating OICs.
A Dissipated Asset is an asset that was either transferred away for less than fair-market value or sold and the proceeds were used for things other than paying their federal tax liability. This can include stocks or real estate sold years ago where the proceeds were used to pay credit card debt, state tax debts or other unsecured creditors.
When the IRS conducts their investigation, they will focus on the prior tax returns and other records to determine if there have been any transfers or sales of assets, and seek to have the proceeds included in the RCP calculation. For most taxpayer’s, this would seem to bring their OIC to an ignominious end.
Defending against the “Dissipated Asset” label
An asset is not dissipated if it was used for allowable living expenses. There is also a defense if the taxpayer’s business paid for the asset and the proceeds went back into the business to cover operating costs of that business.
Given how dissipated assets have become an IRS priority, at Convicer & Percy we have begun reviewing a taxpayer’s last 6 years of returns for any sales or transfers, and consider their impact on any OIC we may file.
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Attorney Eric L. Green is Of Counsel to the law firm of Convicer & Percy, LLP in Glastonbury, Connecticut (www.convicerpercy.com), where he focuses his practice in civil and criminal taxpayer representation before the IRS and state tax authorities, business planning and estate planning. Attorney Green represents taxpayers in Western Massachusetts and all of Connecticut. Attorney Green is currently the vice chair of the Closely held Business Tax Committee of the American Bar Association, and is on the Executive Committee of the Connecticut Bar Association’s Tax Committee. He can be reached at egreen@convicerpercy.com.
