In part 1 of this article, I discussed spending down assets for an offer in compromise and how the IRS may treat dissipated assets spent on items other than delinquent tax debt. Unless assets are spent on necessary items for health and welfare of the taxpayer and family or for the production of income, the IRS can look back three years and recapture dissipated assets to include in the taxpayer’s reasonable collection potential.[1] The effect of this recapture of dissipated assets is that the taxpayer will be required to pay the value of those assets for an offer in compromise, even though the taxpayer no longer has the assets to pay. A harsh result for the taxpayer!
However, the IRS has determined that some expenditures will not be treated as a dissipated asset. The items of approved expenditures include:
- Assets spent before tax liability was owed.[2]
- Dissolving investments to pay necessary living expenses.[3]
- Substantial withdrawals from bank accounts where taxpayer is able to show that funds were used to pay for living expenses or production of income.
Expenditures that are not approved and may result in a finding of dissipated assets include[4]:
- Using investments to pay for a child’s wedding, child’s tuition or an extravagant vacation.
- Using a home refinance to pay credit cards not used for the payment of necessary living expenses or the production of income.
- Inherited funds not used for the payment of necessary living expenses or the production of income.
- Sale of real estate and gifting of funds to family members.
Practice Points: While these guidelines are helpful, there are other expenses which are more uncertain as to whether they will be permitted or not. In determining whether the taxpayer may qualify for an offer in compromise, it is critical that the taxpayer analyze current assets to see whether they can be spent for necessary living expenses or production of income rather than being paid over to the IRS under an offer in compromise. However, the taxpayer must carefully consider whether such expenditures will be determined to be a dissipated asset and subject to recapturing the value of the expenditure as part of the offer in compromise.
Taxpayers are encouraged to contact Jared Le Fevre to discuss how current assets and expenditures may be treated in an offer in compromise.
Jared M. Le Fevre is a tax attorney and partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] IRM 5.8.5.18.
[2] IRM 5.8.5.18(2).
[3] IRM 5.8.5.18(7).
[4] IRM 5.8.5.18(3).