If you are delinquent on taxes you may be considering some IRS payment arrangement whereby your total tax liability will be considered satisfied in exchange for a payment plan that is less then the full amount owed. Two different plans that I have had success with lately are Offers In Compromise and Partial Payment Installment Agreements. Usually these monthly payment plans are based on your ‘reasonable collection potential’ which takes into consideration among other things the value of your assets.
In your planning phase before you request consideration you will be tempted and maybe even perhaps advised by someone you trust to spend down your assets before submitting the forms so as to ‘protect’ yourself. This practice is commonly referred to as dissipating assets. I write to tell you now that the IRS is keenly aware of this type of behavior and that it is counterproductive.
A dissipated asset is any asset sold, transferred or depleted to pay down other debts and is subsequently no longer available to pay a delinquent tax liability. The IRS can and will look for these assets and if found include their value in calculating your reasonable collection potential. The higher your reasonable collection potential the less likely you are to settle on terms.
I can tell you as a matter of fact that being suspected of dissipating assets is very serious because it calls into question your credibility and once your credibility is scrutinized opportunity is created for further probing. No one wants that. BELIEVE ME! So be careful in how you move your assets around if you have outstanding tax liabilities. Even if you believe you are behaving prudently its best to understand the guidelines IRS Examiners use to determine if you dissipated assets, intentionally or otherwise. This is what the Internal Revenue Manual generally states in regards to audit guidelines to consider in determining if dissipation occurred.
The time frame with which an asset is dissipated in relation to the OIC submission. Generally, the value of assets dissipated more than five years before the OIC submission will not be included in the reasonable collection potential calculation;
If an asset was used by the taxpayer to pay existing, ongoing business operating expenses, the funds should not be considered a dissipated asset;
When the asset was dissipated in relation to the liability;
How the asset was transferred;
Whether the taxpayer realized any funds from the asset transfer;
How any funds realized from the disposition of assets were used; and
The value of the assets and the taxpayer’s interest in them.
The Tax Court has precedent in ruling in favor of the IRS when dissipated asset values are used to calculate a taxpayer’s reasonable collection potential. For info on that check out T.C. Memo 2011-67 and T.C. Memo. 2011-194