Many taxpayers create durable powers of attorney for estate planning or other purposes. Durable powers of attorney are commonly used to confer authority to make healthcare and financial decisions for the “principal” (i.e., the individual granting the power). What most distinguishes a durable power of attorney from other types of powers of attorney is that it remains in effect and operative, or becomes effective, when the principal becomes incompetent or incapacitated to act for themselves. All 50 states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands recognize and have laws regarding durable powers of attorney.
Tax professionals who regularly represent taxpayers before the IRS are generally well acquainted with Form 2848, Power of Attorney and Declaration of Representative, its uses, the requirements for a valid Form 2848, and the recording of the authorization on the IRS’s Centralized Authorization File (CAF). Depending on the nature of their practice, attorney practitioners may often prepare or have occasion to prepare general or durable powers of attorney for their clients. While attorneys, CPAs, and other practitioners may have clients or prospective clients who have existing durable powers of attorney, the effect of these powers of attorney on federal tax matters, however, may not be well understood by taxpayers (i.e., the principals), the agent or attorney-in-fact (who is usually a spouse or other family member), or tax practitioners retained to represent the taxpayers. The issue typically surfaces when a taxpayer who signed a durable power of attorney later becomes physically or mentally incompetent such that the taxpayer cannot sign a Form 2848 if a tax matter with the IRS arises.
Whether the IRS can accept a durable power of attorney in place of a Form 2848 depends in each case on whether the following requirements are met. As a very general starting point, the IRS will accept a durable power of attorney instead of a Form 2848 if the durable power of attorney includes all of the elements specified in IRS procedural regulations at 26 CFR sections 601.501 – 601.509 (reprinted as IRS Publication 216, Conference and Practice Requirements.). See 26 CFR § 601.503(b)(4) (discussing durable powers of attorney). Specifically, the durable power of attorney must include all the elements of section 601.503(a):
A valid durable power of attorney that includes the necessary elements will only be recorded on the CAF if a filled-in Form 2848 is also submitted with Part II of the form, Declaration of Representative, completed and signed by the appointed representative(s).
By its nature, a durable power of attorney generally will not have the necessary elements, including the tax matters mentioned above, required by the regulations. However, this problem can be cured in limited circumstances. The IRS will accept a Form 2848, in conjunction with a durable power of attorney, under two conditions:,
Also, the attorney-in-fact must attach a written statement to the Form 2848, signed under penalty of perjury, stating that the durable power of attorney is valid under the laws of the state or other jurisdiction in which the durable power of attorney was signed. 26 CFR § 601.503(b)(3)(ii).
The requirements enumerated above for an acceptable power of attorney, including a durable power of attorney, are generally referenced in the Instructions to Form 2848, under “Substitute Form 2848” (see p.5, stating “[t]he IRS will accept a power of attorney other than Form 2848 provided the document satisfies the requirements for a power of attorney. See Pub. 216, Conference and Practice Requirements, and 26 CFR 601.503(a).”)
If a durable power of attorney does not authorize in some manner the attorney-in-fact to handle federal tax matters, then the best, or maybe only, option is for a conservator, guardian, or similar fiduciary to be appointed under state law to act for the incapacitated taxpayer if one has not already been appointed. The fiduciary can complete the necessary Form 2848 (to authorize representation by a tax practitioner) and should also submit IRS Form 56, Notice Concerning Fiduciary Relationship.
The experienced team of Johnson Duffie estate planning attorneys can help you. For more information regarding taxes or dealing with the IRS, contact Wayne M. Pecht, Esquire at 717-761-4540 or [email protected].