How Dissipated Assets Can Impact Your Offer in Compromise
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When taxpayers apply for an Offer in Compromise (OIC), most of the focus is on current income, expenses, and assets. What many people don’t realize is that the IRS also looks backward. If you sold, transferred, or spent assets before submitting an offer, the IRS may treat those assets as if you still have them. These are known as dissipated assets, and they can significantly increase your Reasonable Collection Potential (RCP).
Understanding how the IRS evaluates dissipated assets can mean the difference between an accepted offer and a rejection.
What Are Dissipated Assets?
A dissipated asset is cash, property, or equity that was disposed of before submitting an OIC, where the IRS believes the asset could have been used to pay the tax liability.
Common examples include:
- Large cash withdrawals
- Sale of real estate or investments with proceeds spent
- Gifts or transfers to family members
- Paying unsecured creditors instead of the IRS
- Gambling losses or discretionary spending
- Transfers to a spouse or related entity
The IRS is less concerned with where the money went and more concerned with why it wasn’t applied to the tax debt.
Why the IRS Cares
Offers in Compromise are evaluated using Reasonable Collection Potential, which reflects what the IRS believes it could collect through enforced collection. If assets were dissipated, the IRS may determine that:
- The taxpayer had the ability to pay more
- Assets were removed to qualify for an offer
- Accepting the offer would not be in the government’s best interest
As a result, the IRS may add the value of dissipated assets back into the RCP, even though the asset is gone.
Timing Matters
The IRS does not look back indefinitely. Under IRM 5.8.5.18(2), the IRS generally reviews asset dissipation that occurred within the three years prior to the OIC submission date.
Transactions closer to the filing date receive greater scrutiny, especially if they involve discretionary spending or transfers without necessity. While the IRS can look beyond three years in cases involving intentional avoidance, three years is the general guideline.
Necessary expenses—such as basic living costs, medical care, or legitimate business survival expenses—are less likely to be treated as dissipated assets, even if they fall within the lookback period.
How Dissipated Assets Affect Your Offer
Including dissipated assets in your RCP can:
- Increase the required offer amount
- Lead to outright rejection
- Delay when an offer can be considered
- Raise questions about compliance and intent
In some cases, an offer may be rejected solely because dissipated assets were not properly addressed.
Final Thoughts
Dissipated assets are one of the most misunderstood issues in the OIC process. Many taxpayers unknowingly weaken their offers by selling or spending assets without understanding how the IRS will view those decisions later.
If you’re considering an Offer in Compromise, timing and planning matter. Understanding dissipated assets—and the three-year lookback rule—can help you avoid costly mistakes and improve your chances of acceptance.
Footnote / Authority
IRM 5.8.5.18(2) – Dissipation of Assets:
Establishes the general three-year lookback period used when evaluating dissipated assets for OIC purposes.
