Chief Counsel Advice memorandums are great sources of statements on IRS policy and the thought process of the Service on various issues. They often are not long, which can make them difficult to turn into standalone blog posts. I found one from September fairly interesting though, which discusses penalty abatement for the delinquency penalties when someone is incapacitated. The CCA touches on two issues, the first time abatement provisions and the impact of a power of attorney on the reasonable cause exception to the delinquency penalties. The power of attorney aspect is fairly interesting, especially in considering the related issue regarding refund limitations periods being tolled by financial disability.
In CCA 201637012, the Service requested guidance on whether a potentially incapacitated person who suffered from dementia could have delinquency penalties abated for reasonable cause. I found the CCA interesting because it highlighted the fact that the taxpayer had a valid power of attorney in place, and sought guidance on how that impacted the reasonable cause determination.
read more... The facts indicating that the taxpayer appointed an agent under a durable power of attorney (one that remains operative after someone is incapacitated) prior to becoming incapacitated. Under the POA, the agent was authorized to file tax returns and handle other tax aspects for the taxpayer. The agent knew of the POA. In a later year, the taxpayer filed untimely returns, and the Service assessed delinquency penalties under Section 6651(a)(1) (failure to file) and Section 6651(a)(2) (failure to pay). At some point after the filing of the return, the agent under the POA petitioned the state court for an emergency guardian and conservator for the taxpayer. Usually, when there is a POA in place, we try not to seek guardianship because an agent should have most of the same powers, so I’m curious as to why this was requested. It is possible the taxpayer was fighting the agent, or power outside of the POA was needed. The court did appoint the agent as guardian and used the term “incapacitated” in the order. This was after the late filing, but the CCA seems to indicate it was close enough in proximity to evidence that the taxpayer was incapacitated when the return was not filed. The two questions presented to Chief Counsel were: Chief Counsel first noted that Appeals should determine if the taxpayer qualifies for First Time Abatement under IRM 20.1.1.3.6.1. We have discussed FTA on this blog in the past, which can be found here and here. All tax practitioners should be very familiar with these provisions, as they provide a simple mechanism for eliminating penalties in many cases. I have used these procedures in various cases, including some very large dollar cases, and have had no issue obtaining waivers when we fit within the framework. The remainder of the CCA was the portion that I found more interesting. The CCA went on to discuss reasonable cause for a person suffering from dementia. As stated above, the taxpayer had a valid power of attorney in place the year in which she failed to file the tax return. It is alleged that the taxpayer was incapacitated. Chief Counsel did indicate that it lacked sufficient facts to determine the taxpayer was incapacitated at the time of filing, but seemed to indicate it was possible, and, for purposes of the analysis, assumed that was the case. The taxpayer requested abatement of the penalties pursuant to Treas. Reg. Section 301.6651-1(c)(1), which provides for abatement due to reasonable cause. Serious illness of the taxpayer or a family member can be sufficient to show reasonable cause (but not when your preparer is ill). See IRM 1.2.12.1.2, Policy Statement 3-2. The CCA indicated that if it could be shown that the taxpayer was demented during the year in question, and was unable to handle her own financial affairs, it could support a finding of reasonable cause. What I found slightly more interesting was the discussion about the power of attorney. In the CCA, Counsel states that the POA does not impact the conclusion. Counsel essentially stated that if the guardian had been appointed during the year in question, reasonable cause would likely not apply. This was because the guardian would have a duty to handle the finances, and therefore returns, of the ward. See Bassett v. Comm’r, 67 F3d 29 (2d Cir. 1995) (taxpayer suffered from incapacity due to being a minor, and legal guardian had duty to file returns). With a POA, however, there may be authorization to take actions regarding returns, but there is no affirmative legal duty to prepare and file returns on behalf of the taxpayer. Looking to Boyle, Counsel said the duty to file the tax return is on the taxpayer, and not his agent or employee. I think this is the correct result, but I found it interesting for two reasons. First, that statement from Boyle is usually used to preclude reasonable cause defenses when a taxpayer fails to file due to the mistake belief that the taxpayer’s accountant, attorney, or other preparer is properly handling the return. So, for once, I wasn’t muttering frustration about that case. Second, this position is different than that applicable to seeking a refund due to financial disability. In general, a refund must be timely made, and that time frame is normally three years from the date the return is filed or two years from the date the tax was paid, whichever expires later. This statute can be tolled if the taxpayer is “financially disabled.” Under Section 6511(h), the statute will not expire if the individual is unable to manage his financial affairs because he has a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months. The general IRS requirements for this are found in Rev. Proc. 99-21. Most focus on this Rev. Proc. is on the required doctor’s certification. But, the procedure also requires the person signing the claim to certify that no person was authorized to act on behalf of the taxpayer in financial matters during the period of impairment. The implication is that having a power of attorney in place could preclude the tolling of the statute, because the agent could/should have been acting. Seeking to recoup improperly paid funds is slightly different that having penalties abated, but the situations are sufficiently similar that it is interesting that the Service has different positions.
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Notes from the real world:
A power of attorney, absent extrinsic evidence, does not confer a duty to act, as the CCA memo points out. Nor does it convey a duty on anyone else (for example, a financial institution) to accept it. Appointment as guardian or conservator generally does create a fiduciary duty. So the IRS advice is not surprising; what surprises me is that someone asked.
In my estate planning practice, I prepare many powers of attorney, of the “durable, general” type, that are held by clients and not delivered to the appointed agent until needed. I realize the existence of the POA may be held against the taxpayer in cases of late refund claims that would otherwise be allowed by the Section 6511 provision on disability. That’s a risk we can take.
Questions arise when people choose to use a living trust as a financial management tool. These are increasingly popular in states like New York and California, with archaic probate codes, and since that is where much of the mainstream media is located, generic reporting about them has spread virally to other parts of the country where they have become a favorite marketing tool of insurance agents and others who seek to profit from the elderly with admonitions about the evils of probate.
In many situations, fiduciary duties cannot be delegated with a POA — although I see many banks and brokers accepting a POA given by a disabled trustee, when the correct procedure would require confirming a successor trustee. Many trusts contain a provision naming such a successor in the event of incapacity confirmed by a physician. If the successor trustee does not immediately exercise this change, whose fault is it that no return is filed or tax paid? And is a POA still needed to sign a return? Is the successor trustee obligated to at least make payments to IRS? Answers to these questions may be forthcoming from IRS in the next twenty years.
In doing some research this morning, I came across the regulations that explain what to do when an agent has a power of attorney authorizing action on tax matters, but not on the magical IRS Form 2848. I suspect that these hoops are not generally known to or jumped through by many practitioners and their clients, although there may have been earlier references to them on this blog:
26 CFR 601.503 . . . (2) Other documents. The Internal Revenue Service will accept a power of attorney other than form 2848 provided such document satisfies the requirements of § 601.503(a). However, for purposes of processing such documents onto the Centralized Authorization File (see § 601.506(d)), a completed form 2848 must be attached. (In such situations, form 2848 is not the operative power of attorney and need not be signed by the taxpayer. However, the Declaration of Representative must be signed by the representative.)
(3) Special provision. The Internal Revenue Service will not accept a power of attorney which fails to include the information required by §§ 601.503(a)(1) through (5). If a power of attorney fails to include some or all of the information required by such section, the attorney-in-fact can cure this defect by executing a form 2848 (on behalf of the taxpayer) which includes the missing information. Attaching a form 2848 to a copy of the original power of attorney will validate the original power of attorney (and will be treated in all circumstances as one signed and filed by the taxpayer) provided the following conditions are satisfied –
(i) The original power of attorney contemplates authorization to handle, among other things, Federal tax matters, (e.g., the power of attorney includes language to the effect that the attorney-in-fact has the authority to perform any and all acts).
(ii) The attorney-in-fact attaches a statement (signed under penalty of perjury) to the form 2848 which states that the original power of attorney is valid under the laws of the governing jurisdiction.
Steve, I finally got around to reading the CCA. I was bothered by a preliminary statement in the CCA that’s not pertinent to what you covered in your post: The first sentence of the Conclusions is a recommendation for the Service to abate the penalties “under the First Time Abatement rules” in IRM 20.1.1.3.6.1. This bothers me because I usually prefer to obtain abatement for reasonable cause (at least where this relief won’t cost too much relative to the amount at issue). That approach preserves the taxpayer’s first time abatement relief for a situation where there’s no valid reasonable cause defense.
Thanks for covering this CCA and the differences between the physical or mental disability issues in the CCA and the financial disability issues for tolling the refund claim statute of limitations.
Ron, I hope you are well. I had the same thought. Most of my clients are inclined to take the cheap, easy route, and swear they will never need FTA again, but my preference is to preserve that right for the future.