IRS Offer in Compromise: The Three-Year Dissipated Assets Rule

In an IRS Offer in Compromise, dissipated assets are things you once owned that left your balance sheet through sales below market value, gifts, or spending on non-essentials while you owed federal tax. Under Internal Revenue Manual 5.8.5.18, the IRS can add the value of those assets back into your settlement calculation even though the money is gone, which inflates the minimum offer it will accept.¹ This rule catches more applicants off guard than almost any other part of the OIC process, and understanding it before you file is often the difference between an accepted offer and a rejection you can’t afford to fix.

What Counts as a Dissipated Asset

The IRS defines a dissipated asset as property transferred for less than full value, or non-income proceeds spent on anything other than producing income or covering health and welfare needs for you and your family.¹ The word “proceeds” matters. If you cashed out a $90,000 retirement account and bought a boat while owing $120,000 in back taxes, those funds are treated as dissipated. Your regular paycheck spent on groceries is not.

Common examples include selling real estate to a family member at a steep discount, gifting large sums of cash, draining investment accounts on luxury purchases, and paying off private debts instead of the IRS. Timing and knowledge matter. Transferring a rental property to your brother for $1 while a $200,000 assessment was hanging over you reads very differently from selling that property at market price two years before you owed anything.

The Three-Year Lookback and Its Exceptions

The IRS generally looks back three calendar years from the year you submit your OIC. The year of submission counts as a full year. File Form 656 in 2026, and the IRS examines transactions from 2024, 2025, and 2026. Assets you transferred in 2023 or earlier normally fall outside the window.¹

“Normally” is doing real work in that sentence. The IRM lets the IRS count a transfer that happened more than three years before your submission if the transfer occurred within six months before or after your tax was assessed. If you moved assets while the IRS was examining your return, the time limits may not apply at all.¹ The logic: someone who dumps assets right when the IRS is closing in doesn’t get a pass just because they waited a few years to file an offer.

There’s also a disclosure question that reaches further than the RCP calculation itself. Form 433-A (OIC) asks whether you transferred any asset worth more than $10,000 for less than full value within the past 10 years.² A “yes” answer doesn’t automatically add the transfer to your offer, but it gives the examiner a thread to pull. If a pattern of below-value transfers turns up beyond three years, the exceptions above become available. Answering falsely creates a separate problem entirely.

How Dissipation Inflates Your Offer Amount

The IRS calculates Reasonable Collection Potential (RCP) to set the minimum offer it will accept. RCP has two components: the equity in your current assets and your future remaining income, calculated as your monthly surplus multiplied by 12 or 24 depending on which payment option you choose.³ Any dissipated asset gets stacked on top of both components.

Here’s where it gets painful. Say your current assets have $5,000 in equity and your future income calculation yields $15,000. Your RCP is $20,000, and an offer around that amount could be accepted. But if you gifted $40,000 in stock to your adult child last year, the IRS adds that $40,000 to your RCP. The minimum acceptable offer jumps to $60,000. You don’t have the stock, your child may have spent the proceeds, and the IRS treats the value as though it were sitting in your bank account.¹

The dissipated amount appears on the Asset/Equity Table (AET) worksheet that accompanies any rejection letter. If the inflated RCP exceeds what you can realistically pay, the offer gets rejected. This is the single most common way a dissipation finding kills an otherwise viable OIC.

Spending That Doesn’t Count Against You

Not every reduction in net worth triggers a dissipation finding. The IRM specifically excludes funds spent on items necessary for producing income or maintaining the health and welfare of the taxpayer’s family.¹ In practice, rent, mortgage payments, utilities, food, medical care, and keeping a business running won’t be counted against you, even at substantial dollar amounts.

The IRS measures “necessary” against its own Collection Financial Standards, which set local and national benchmarks for housing, transportation, and basic living costs. Housing varies by county; transportation varies by Census region. You’re usually allowed the lesser of what you actually spent or the IRS standard amount.⁴ Spending above the benchmarks doesn’t automatically become dissipation, but it invites scrutiny.

Business Expenses

If you sold personal assets and used the money to keep a business operating, those funds generally aren’t dissipated. The IRM’s language about “items necessary for the production of income” covers ordinary business costs like payroll, inventory, rent, and equipment. The examiner will want documentation showing the money actually went to business expenses rather than personal purchases routed through a business account.

Asset Replacement

If you sold one asset and used the proceeds to buy another asset that already appears in your OIC evaluation, the sold asset should not be counted as dissipated.¹ Selling a car worth $15,000 and buying a different car worth $12,000 doesn’t create a $15,000 dissipation finding. The replacement vehicle already sits on your balance sheet. You might see a question about the $3,000 difference, but the full value of the original asset won’t be added back.

What Examiners Flag

Examiners look for patterns, not just isolated transactions. Large withdrawals shortly before filing the OIC, transfers to relatives for little or no consideration, and paying off credit cards while ignoring the IRS all raise red flags. A $30,000 gift to your daughter two weeks before submitting Form 656 tells a very different story than the same gift given before you knew you owed taxes.

Documentation You’ll Need

The documentation burden sits on you. Form 433-A (OIC) requires personal bank statements for the three most recent months and six months of statements for any business accounts.² Beyond that baseline, expect the examiner to request records covering the full lookback period if anything looks unusual.

For real estate, you’ll need closing disclosures showing the sale price and how proceeds were distributed. For vehicles, expect to produce title transfer documents and proof of sale price. Medical expenses should be supported by bills or insurance explanations of benefits. Business expenses need invoices, receipts, or account statements tying the spending to actual operations. If you transferred property, gather appraisals, deeds, and any written agreements showing the terms. An arm’s-length sale to an unrelated buyer at market price is easy to defend. A below-market transfer to a family member with no written agreement is not.

Records are your primary defense. The examiner isn’t obligated to give you the benefit of the doubt if you can’t explain a $50,000 drop in your net worth, so the more organized your file is before submission, the less room there is for negative inferences.

Challenging a Dissipation Finding

If the IRS rejects your OIC over dissipated assets, you have 30 days from the date of the rejection letter to request an appeal with the IRS Independent Office of Appeals.⁵ Miss that deadline and the appeal right is gone. You can use Form 13711 or submit a separate written protest.

Specificity wins appeals. Your rejection letter includes an AET worksheet showing exactly how the examiner calculated your asset equity, including any dissipated amounts. Compare those figures line by line against the Form 433-A (OIC) you submitted. For each disputed item, explain why you disagree and attach supporting documentation.⁵ A vague protest saying “I disagree with the dissipation finding” won’t move. An appeal that says “The $25,000 withdrawal on March 15, 2025 paid for emergency surgery, as shown by the attached hospital billing statement” gives the Appeals officer something to work with.

Your written protest must include your name, address, tax identification number, the tax periods involved, a copy of the rejection letter, and your signature under penalties of perjury.

Risk to Family Members Who Received Your Assets

A dissipation finding doesn’t only affect you. The person who received the transferred property can face collection under transferee liability rules. Federal law lets the IRS pursue a transferee, including a family member who received a gift, an heir, or a business partner who received assets in a liquidation, for the unpaid tax.⁶

The IRS has two paths. It can assess the transferee’s liability administratively under IRC 6901, which must happen within one year after the assessment period against the original taxpayer ends. If that window closes, the IRS can sue in federal court, potentially reaching as far back as the 10-year collection statute allows.⁷ State fraudulent-transfer time limits don’t bind the IRS in these suits. So the sibling who received your $50,000 property transfer may hear from the IRS years later. Worth considering before making anyone else a participant in your tax problem.

1
Internal Revenue Service. IRM 5.8.5 Financial Analysis – Section: 5.8.5.18 Dissipation of Assets
2
Internal Revenue Service. Form 433-A (OIC) Collection Information Statement for Wage Earners and Self-Employed Individuals
3
Internal Revenue Service. Form 656-B Offer in Compromise Booklet
4
Internal Revenue Service. Collection Financial Standards
5
Internal Revenue Service. Appeal Your Rejected Offer in Compromise (OIC)
6
Office of the Law Revision Counsel. 26 USC 6901 – Transferred Assets
7
Internal Revenue Service. IRM 5.17.14 Fraudulent Transfers and Transferee and Other Third Party Liability