I hear from people every week who think their tax problem is the end of the world. It usually isn't. I'm Darrin Mish. I've resolved over $100 million in tax debt for clients. Here's what you should know.
The Letter That Kills Half of Offers in Compromise
You submitted a clean OIC. The financials check out. The Reasonable Collection Potential math works. Then a letter arrives from the Offer Examiner proposing to add tens of thousands – sometimes hundreds of thousands – to your RCP because of “dissipated assets.” Your offer is suddenly upside down.
This happens more than the IRS likes to admit. And while a dissipated asset claim feels like the end of your offer, it is not. There is a defined IRM procedure, a documented response strategy, and a successful appeal path. The Examiner is making an argument, not issuing a judgment.
What “Dissipated Assets” Actually Means
Under IRM 5.8.5.16, a dissipated asset is an asset the taxpayer had during the lookback period – typically three years prior to the OIC submission – that has been disposed of or used in a manner that did not benefit the tax liability. The IRS adds the fair market value of that asset back into RCP as if it were still available to pay the tax.
Examples that draw IRS attention: gifting real estate to family members, paying off dischargeable credit card debt with retirement distributions, cashing in life insurance and spending it on non-essentials, taking a 401(k) distribution to fund a vacation, transferring vehicles to a spouse before filing.
The Examiner looks at bank statements, transcripts, asset transfer records, and lifestyle indicators to identify potential dissipation events. The lookback is fact-specific, not rigidly calendar-based – Examiners have authority to look further back when circumstances warrant.
What the IRS Must Establish
This is the part most taxpayers do not understand. The dissipated asset claim is not automatic. The IRS bears the burden of establishing four elements before adding the asset back to RCP.
First, the taxpayer must have owned or had access to the asset during the lookback period. Second, the taxpayer must have known or reasonably should have known about the tax liability at the time of the disposition. Third, the asset must have been disposed of for less than full value or used for non-essential purposes. Fourth, the disposition must have prevented the asset from being available to satisfy the tax debt.
Take any one of those elements out and the dissipation claim fails.
How to Respond When the Examiner Makes the Claim
The Examiner will issue a Letter 1840 or similar correspondence laying out the proposed RCP additions. You typically have 15 to 30 days to respond before the offer is rejected or returned.
The response is a written rebuttal addressing each claimed dissipation event individually. For each one, attack the weakest element.
If the asset was sold for fair market value and the proceeds went to legitimate living expenses, document it. Bank records, receipts, third-party appraisals. The disposition was not a dissipation if the value was preserved and the spending was necessary.
If the disposition happened before the taxpayer knew about the tax liability, prove it. Dates of CP notices, dates of assessment, dates of the disposition. Knowledge is a factual element with a fixed timeline.
If the asset transfer was to satisfy a legitimate prior obligation – a divorce decree, a court order, a secured debt that would have been foreclosed – that is not dissipation under IRM 5.8.5.16.
If the disposition was forced – repossession, foreclosure, medical emergency, casualty loss – that is not dissipation either.
The IRM Revision Most Practitioners Have Not Caught Up On
In late 2021, the IRS substantially revised IRM 5.8.5.16 in favor of taxpayers. The current version requires Examiners to consider whether including the dissipated asset value would create economic hardship. It also tightened the documentation Examiners must produce before claiming dissipation and limited aggressive lookback periods absent specific factual support.
If you are responding to a dissipation claim, cite the current IRM version explicitly. Many Examiners are still working from older mental models. After 32 years of doing this work, I will tell you that nothing shifts an Examiner’s posture faster than a citation to the IRM section that constrains their own discretion.
If the Examiner Will Not Move
If the rebuttal does not resolve the issue at the Examiner level, you have an appeal right. After the OIC is rejected, file a Form 13711 within 30 days of the rejection letter. The case goes to the IRS Office of Appeals where a different officer reviews the file with fresh eyes.
Appeals officers operate under different incentives than Offer Examiners. They are evaluating litigation risk and hazards of litigation. A well-documented dissipated asset rebuttal often gets a much friendlier reception in Appeals than it did at the Centralized Offer in Compromise unit.
Do not skip Appeals. The same case rejected at COIC has a real shot at acceptance in Appeals with the right argument framed correctly.
When the Claim Is Actually Valid
Sometimes the Examiner has caught real dissipation. If you genuinely transferred a $200,000 boat to your brother-in-law for $1 two months before submitting your offer, no rebuttal is going to save you.
When the claim is solid, the path forward is amending the offer to reflect the dissipated asset value, or pursuing a different collection alternative – usually a partial pay installment agreement or CNC status while the CSED runs.
The worst move is to keep pushing an offer the IRS has correctly priced. That just wastes time and burns CSED in your favor without resolving anything.
What to Bring to the Fight
If you are walking into a dissipated asset dispute, you need documentation, not arguments. The Examiner responds to paper, not protest.
Bank statements for every relevant month. Appraisals or fair market value evidence for any asset they claim was disposed of below value. CP notice dates showing when you first learned of the tax liability. Court orders, divorce decrees, or other forced transfer documentation. Receipts and invoices showing where the money went and whether the use qualified as necessary or non-essential.
Build the rebuttal like you are presenting it to a federal judge. Because if Appeals does not move it, that is exactly what comes next.
Get Help Now
If an Offer Examiner has claimed dissipated assets and your offer is at risk, you do not have to walk away. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100 for a free consultation. We rebut dissipation claims at the Examiner level and win them on appeal.