The OIC Impact of Lloyd v. Commissioner - Income Tax Legal Blogs Posted by Joseph M. Callahan - Lawyers.com

The OIC Impact of Lloyd v. Commissioner

On April 10, 2017, the U.S. Tax Court published the opinion, Lloyd v. Commissioner (docket number 17559-15L). In that case, Lloyd, the petitioner, appealed an offer in compromise (OIC) rejection by the respondent, Internal Revenue Service (IRS). Lloyd based her OIC on the contention that collecting the full debt would be highly unlikely given the circumstances. She claimed that her financial information supported this contention. In the end, the Tax Court upheld the decision made by the IRS, forcing Lloyd to settle the debt through other means.

In this article, we will look at the facts of the Lloyd case and then discuss the implications of the opinion for future OICs. As we will see, it’s important for those submitting OICs to be aware of the local standards for allowable living expenses, as these expenses can significantly impact one’s “reasonable collection potential” (RCP) calculation.

The Lloyd Case Factual Outline

Lloyd was working in the commercial insurance brokerage business and had accumulated a sizable back tax debt of approximately $100,000, over the course of 10 business quarters. Rather than request a payment plan, Lloyd submitted an OIC in which she offered $3,000 to bring her account up-to-date. In support of her OIC, Lloyd supplied documentation regarding her income, living expenses, total assets and total liabilities. As part of her expenses, Lloyd included amounts for monthly rent and vehicle upkeep, which amount exceeded the amounts permitted by the local IRS standards. Significantly, the IRS has localized standards for allowable living expenses, and these standards are designed to accommodate differences in relative costs of living around the country. If you’re preparing to submit an OIC in the future, you need to be absolutely certain that you double check these amounts, in order to determine which amounts will be permitted to you as allowable expenses.

In Lloyd’s case, the Tax Court ruled in favor of the IRS and concluded that Lloyd was capable of paying a much greater share of the debt than just the $3,000 offered. Lloyd tried to argue that, even though her expenses exceeded local IRS standards, the IRS should have permitted her to deviate from the applicable standards because the amounts were necessary given her specific circumstances; that is, that they were expenses necessary to effectively run her business.

Deviation from Local IRS Standards

When determining a taxpayer’s RCP, the IRS uses localized standards and will ordinarily reject an attempt to substitute amounts which exceed these standards. However, a taxpayer may be able to deduct expenses which exceed those allowed by the applicable standards unless the taxpayer can prove that “special circumstances” exist which make these higher expenses necessary to cover reasonable living costs. In other words, if a taxpayer can show that he or she must pay higher expenses than those typically allowed, then this taxpayer may be permitted to deviate from the allowable amounts for the purposes of calculating RCP and determining the reasonableness of their Offer in Compromise.

In the Lloyd case, the petitioner gave no compelling reasons for why her housing costs and vehicle costs were inordinately high (by localized standards). Her actual housing costs were actually on a par with those considered reasonable for a household twice her size, and the IRS rejected the argument that her luxury vehicle was an integral part of her continued success in the commercial insurance industry.

There are key highlight for taxpayers that are considering an OIC to take away from the Lloyd case. First, when submitting an OIC, a taxpayer needs to be certain about the amounts allowed for expenses under local standards; and, if those amounts are exceeded, the taxpayer needs to be sure to have adequate evidence showing why these amounts are absolutely necessary. If a taxpayer can’t back up the amounts with solid evidence, the IRS is very unlikely to allow a deviation from the established rules.

Manhattan Tax Attorneys With OIC Experience

So, no matter what your situation may be, if you’re a taxpayer contemplating an Offer in Compromise, it’s strongly advised that you seek out competent counsel from a qualified tax attorney prior to submitting an OIC. Qualified tax professionals, such as those at Mackay, Caswell & Callahan, P.C., can help you prevent the sort of blunder made in the Lloyd v. Commissioner case. Contact us online or toll free at 844-MCC4-Tax.

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Joseph M. Callahan

Licensed since 1986

Member at firm Mackay, Caswell & Callahan, P.C.

AWARDS

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