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 sets a durable power of attorney apart 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, 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 general or durable powers of attorney for their clients. While attorneys, CPAs and other practitioners have clients with existing durable powers of attorney, the effect of these powers of attorney on federal tax matters 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 they 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 §§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 §601.503(a):
- Taxpayer’s name and mailing address
- Taxpayer’s TIN (i.e., SSN, EIN, etc.)
- An employee plan number, if applicable
- Name and mailing address of the appointed representative(s)
- A description of the matter(s) for which the representation is authorized that must include, as applicable:
- Type of tax involved
- Federal tax form number involved
- Specific year(s) or non-annual period(s) involved
- Decedent’s date of death in estate matters
- “A clear expression of the taxpayer’s intention concerning the scope of authority granted to the…representative(s)”
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:
The “attorney-in-fact” — the individual authorized in the durable power of attorney to act for the “principal” (i.e., the taxpayer) — executes a Form 2848 on behalf of the taxpayer that includes the missing information, such as the type(s) of tax, tax form numbers and tax periods applicable to the situation for which the representation before the IRS is needed; and
The durable power of attorney authorizes the attorney-in-fact to handle federal tax matters or encompasses this authority “(e.g., the power of attorney includes language…that the attorney-in-fact has the authority to perform any and all acts [for the incompetent individual])” 26 CFR §601.503(b)(3)(i)
Also, the attorney-in-fact must attach a written, signed statement to Form 2848, stating 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). A sample of a written statement can be found in Publication 947, Practice Before the IRS and Power of Attorney.
The requirements 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.”
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 incompetent taxpayer if one has not already been appointed. The fiduciary can complete Form 2848 (to authorize representation by a tax practitioner) and should also submit IRS Form 56, Notice Concerning Fiduciary Relationship.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.