Quick Answer:
Dissipated assets can raise your offer in compromise amount because the IRS adds their value to your reasonable collection potential, the minimum it will accept. A dissipated asset is money or property you sold, transferred, borrowed against, or spent on non-essential items after you owed the tax, generally within three years before your offer. Money spent on necessary living expenses does not count.
An offer in compromise is built on one number: what the IRS could realistically collect from you. Most taxpayers assume that number reflects what they own today. It does not always. If you cashed out savings, sold property, or gave money to family after you owed the tax, the IRS can add that value back into the calculation. The IRS calls these dissipated assets, and it is one reason a well-prepared offer can be rejected.
This article explains how the IRS identifies dissipated assets, the three-year lookback and its exceptions, what spending the IRS accepts, and how to protect your offer before you file.
Key Takeaways
- Definition: A dissipated asset is any asset sold, transferred, encumbered, or spent on non-priority items after the tax liability arose, and no longer available to pay the IRS.
- RCP impact: The IRS can add the value of dissipated assets to your reasonable collection potential (RCP), raising the minimum acceptable offer.
- Three-year lookback: The IRS generally reviews the three years before the offer submission under IRM 5.8.5.18(2), with exceptions for transfers near the assessment date or during an examination.
- Necessary expenses are protected: Funds used for the health and welfare of the taxpayer or their family, or the production of income, are not dissipated assets.
- Documentation decides: The IRS must give you an opportunity to explain before including a dissipated asset. Records showing where the money went are your strongest defense.
A Dissipated Asset Is Value You Gave Up After the Tax Was Owed
A dissipated asset is any asset you sold, transferred, borrowed against, or spent on non-essential items after you owed the tax. The IRS can count it toward your offer as if you still had it. Under IRC § 7122, the IRS may compromise a liability when there is doubt the full amount can be collected. To measure collectibility, the offer examiner calculates your RCP: the net realizable equity in your assets plus your future income.
IRM 5.8.5.18(1) provides for the inclusion of dissipated assets in the RCP calculation where the taxpayer sold, transferred, encumbered, or otherwise disposed of assets in an attempt to avoid paying the tax, or used the assets for something other than items necessary for the production of income or the health and welfare of the taxpayer or their family. The conduct must occur after the tax was assessed or within six months before or after the assessment.
The principle is straightforward. The IRS will not accept less than it could collect because the taxpayer emptied accounts or moved property out of reach before asking for a settlement.
Dissipated Assets Increase Your Reasonable Collection Potential
The IRS adds the full value of a dissipated asset to your reasonable collection potential (RCP), the minimum amount it will accept in an offer in compromise. A dissipated asset carries the same weight in the RCP calculation as an asset you still own. If you cashed out a $40,000 brokerage account and spent it on non-priority items, the IRS can add $40,000 to your RCP even though the money is gone.
The result can often be fatal to the offer. An offer amount is acceptable only if it equals or exceeds RCP. When dissipated assets push RCP above what you can pay, the IRM directs the examiner to reject the offer if the taxpayer is unwilling or unable to increase the offer to include that value.
The IRS Looks Back Three Years, With Exceptions
The IRS generally looks back three years from the date you submit your offer to find dissipated assets. IRM 5.8.5.18(2) sets this three-year timeframe as the default for deciding whether a dissipated asset belongs in RCP. The IRM counts the year of submission as a full year. Its own example: for an offer submitted in 2021, assets dissipated in 2018 or earlier are not included. Applied today, an offer submitted in 2026 reaches back to dispositions in 2024, 2025, and 2026.
Three situations expand or override that window:
- Transfers near the assessment. Even outside the three-year window, the IRS may include an asset transferred or sold within six months before or after the tax was assessed.
- Transfers during an examination. If you moved assets after receiving notice of an audit or while the audit was open, the IRM permits the examiner to disregard the standard timeframes based on the facts of the case.
- Pre-liability transfers. The rule cuts the other way as well. If the tax liability did not exist when the transfer occurred, or the transfer happened before the taxable event that created the liability, the IRM states the taxpayer generally cannot be said to have dissipated the asset in disregard of the tax.
Timing is the first question to answer in any dissipation analysis. Map every significant disposition against the tax year, the assessment date on your account transcript, and any examination dates before you file.
Spending on Non-Priority Items Triggers Inclusion
Money spent on items not needed to earn income or support your family’s health and welfare can be counted as a dissipated asset. The IRM calls these non-priority items: anything not needed for the production of income or the health and welfare of the taxpayer and their family. IRM 5.8.5.18 lists examples that support including the asset in RCP:
- Refinancing your house and using the funds to pay off credit card debt. The credit cards were NOT used for payment of necessary living expenses and/or the production of income.
- Receiving an inheritance and spending it on non-priority items.
- Withdrawing money from a retirement or investment account and spending it on a child’s wedding, a child’s university tuition, or an extravagant vacation while the tax remains unpaid.
- Selling property and gifting the funds to family members.
The same test applies when you repay other creditors ahead of the IRS. Paying back a loan from a relative, friend, or business associate is treated like any other use of funds. Unless the borrowed money paid for necessary living expenses or the production of income, the IRS may treat the repayment as a dissipated asset.
Necessary Living Expenses Are Not Dissipation
Money spent on necessary living expenses or the production of income is not a dissipated asset. IRM 5.8.5.18 is clear on this point. The IRS will not include an asset in RCP when:
- Internal research or taxpayer documentation shows the funds were needed to cover necessary living expenses.
- The taxpayer documents that the funds paid for medical care.
- The taxpayer disposed of one asset and used the proceeds to acquire another asset that is already included in the offer evaluation.
The IRM also requires the examiner to determine, in every case where inclusion is considered, whether the funds went to the health and welfare of the family or the production of income. A taxpayer who drained savings to cover rent, food, utilities, and medical bills during a period of unemployment has not dissipated those funds. The taxpayer must still prove it.
Voluntary Retirement Contributions Can Be Treated as Dissipated
Voluntary retirement contributions made while you owe the IRS can be counted as a dissipated asset if you cannot access the funds. The note to IRM 5.8.5.10 provides that if a taxpayer made significant voluntary contributions to a retirement plan after the tax was assessed, or within three years before submitting the offer, and cannot access the funds, those contributions may be included in RCP as a dissipated asset.
The logic follows from IRM 5.8.5.10, which treats voluntary retirement contributions as not a necessary expense. Money directed into a locked plan while a tax balance is outstanding is money the IRS could have collected. Taxpayers planning an offer should review payroll deferral elections before filing.
Transfers to Family Raise Separate Nominee Issues
Giving money or property to family can trigger both a dissipation finding and a separate claim that the property still belongs to you. IRM 5.8.5.6 directs the examiner to separately evaluate assets held by others as transferees, nominees, or alter egos. A house deeded to an adult child for nothing, or funds moved into a relative’s account that the taxpayer still controls, may be treated as the taxpayer’s own asset under these rules.
The distinction matters. Dissipation adds value to RCP. A nominee or transferee finding can also expose the property itself to a federal tax lien and collection action. A transfer to a related party should be analyzed under both frameworks.
How You Used the Funds Determines IRS Treatment
The IRS evaluates each disposition on its own facts. The table below summarizes how the IRM treats common uses of funds.
| Use of Funds | IRS Treatment | Support / Authority |
|---|---|---|
| Rent, food, utilities, and other basic living expenses | Not dissipated | Necessary expenses must be documented |
| Medical bills and treatment costs | Not dissipated | Medical bills, receipts, insurance statements |
| Business expenses that produce income | Not dissipated | Business bank statements, invoices |
| Selling one asset to buy another included in the offer | Not dissipated | Closing or purchase documents for both assets |
| Child’s wedding, university tuition, or extravagant vacation | Dissipated | IRM 5.8.5.18 example |
| Spending an inheritance on non-essential items | Dissipated | IRM 5.8.5.18 example |
| Paying credit cards used for non-essential purchases | Dissipated | IRM 5.8.5.18 example |
| Significant voluntary retirement contributions you cannot access | May be dissipated | IRM 5.8.5.10 note |
| Gifting money or property to family | Dissipated, and may also trigger a nominee or transferee claim | IRM 5.8.5.18; IRM 5.8.5.6 |
You Have the Right to Explain Before the IRS Adds the Value
That contact is the most important moment in a dissipation dispute. Respond with a written reconciliation that ties each large withdrawal or sale to specific expenses, supported by bank statements, receipts, medical bills, lease agreements, and proof of income during the period. A general statement that the money went to living expenses rarely succeeds.
The Tax Court Holds the IRS to Its Own Rules
The Tax Court upholds dissipation findings when taxpayers lack records and overturns them when the IRS ignores its own timeframes. These disputes typically reach the court through Collection Due Process review, where the court evaluates whether Appeals followed the IRM.
In Johnson v. Commissioner, 136 T.C. 475 (2011), the court upheld the inclusion of liquidated investments in RCP. The taxpayer claimed the funds paid professional fees, living expenses, and business costs but produced no documentation. Without substantiation, Appeals did not abuse its discretion.
In Campbell v. Commissioner, T.C. Memo. 2019-4, the court reached the opposite result. Appeals included assets transferred six years before the assessment and roughly ten years before the offer. Because the transfers fell well outside the three-year lookback and the six-month assessment window, the court held that including them was an abuse of discretion.
Together, the cases set the rules of engagement. Taxpayers lose when they cannot document where the money went. The IRS loses when it reaches beyond the timeframes in its own manual.
Protect Your Offer Before You File
The best defense against a dissipation finding is documenting every major withdrawal and transfer before you submit Form 656. Dissipation problems are easier to prevent than to fix. Take these steps:
- Pull your account transcripts. Confirm the audit assessment date for every tax period. That date anchors the six-month window in IRM 5.8.5.18.
- Review three years of bank and brokerage statements. Flag every large withdrawal, transfer, sale, refinance, or loan.
- Build a disposition schedule. For each flagged item, record the date, amount, and use of the funds, with supporting documents attached.
- Stop non-priority spending. Once you decide to pursue an offer, every dollar spent outside allowable expenses can be added back.
- Evaluate the math with dissipated assets included. If the offer only works when dissipated assets are excluded, consider whether a partial payment installment agreement or currently not collectible status is the better path.
An Offer Rejected for Dissipation Can Be Appealed
You can appeal an offer rejected for dissipated assets by filing Form 13711 with the IRS Independent Office of Appeals within 30 days of the rejection letter. The appeal should address each item the examiner included, citing the timing rules and necessary-expense exclusions in IRM 5.8.5.18 and the documentation supporting your position. If the offer was submitted within a Collection Due Process hearing, the Appeals determination is reviewable by the Tax Court under IRC § 6330(d).
Frequently Asked Questions
What is a dissipated asset in an offer in compromise?
A dissipated asset is an asset, liquid or non-liquid, that was sold, transferred, encumbered, or spent on non-priority items after the tax liability arose and is no longer available to pay the tax. Under IRM 5.8.5.18, the IRS may include its value in your reasonable collection potential.
How far back does the IRS look for dissipated assets?
The IRS generally uses a three-year lookback measured from the offer submission, counting the year of submission as a full year. The IRS may look further back for transfers made within six months before or after the assessment, or during an examination.
Can my offer still be accepted if the IRS includes dissipated assets?
Yes, if you raise the offer to cover their value. IRM 5.8.5.18 directs rejection only when the taxpayer is unwilling or unable to increase the offer to include the dissipated amount. A loan from family or a refinance can make up the difference.
Can paying down my mortgage or car loan before filing lower my offer amount?
Sometimes it can. Cash counts at full value in an offer, but a home or car is valued at its quick sale value, generally 80% of fair market value, less the loan balance, and a set amount of equity is excluded for up to two vehicles. A paydown can shift money into that gap.
What if I invested money in a business that failed?
It depends on timing. Under IRM 5.8.5.18, funds invested before the tax liability existed are generally not dissipated. Funds invested after the liability arose are judged by whether they were used for the production of income or necessary living expenses. In Johnson v. Commissioner, the Tax Court accepted that funds put into a business to pay the owner’s salary could be excluded if that salary covered necessary living expenses, but the taxpayer lost because he could not document it.
Can I appeal an offer rejected for dissipated assets?
Yes. File Form 13711, Request for Appeal of Offer in Compromise, within 30 days of the date on the rejection letter.
Facing a Dissipated Asset Issue? East Coast Tax Consulting Group Can Help
Our team reviews your transcripts, bank records, and asset history before an offer is filed, so dissipation issues are identified and documented in advance. If the IRS has already included dissipated assets in your RCP, we prepare the rebuttal and represent you through Appeals.
Call 561-826-9303 for a consultation.
