OIC - 401k distribution


Hi all,
Taxpayer’s Offer is in Appeals. She liquidated her 401k from a former employer (family was undergoing hardship due to failed business). Taxes and penalty were withheld. She used the remainder for necessary expenses. Appeals is disallowing certain expenses paid with the distribution and is treating it as asset equity. Expenses disallowed: personal loan (used for living before distrib), advance car payments (to be ahead), credit card payments.

Thoughts on the above situation and any tips for working with the appeals officer?
Thank you!