Can a durable power of attorney handle IRS tax matters?

A durable power of attorney can be an important part of a client's financial planning, but will it work when someone needs to handle federal tax matters with the IRS? The answer depends on the authority the document provides.

A durable power of attorney can allow a designated agent to act for an individual who later becomes physically or mentally incompetent. However, the document must provide sufficient authority for federal tax matters. If that authority is missing, resolving a client's IRS issues after incapacity can become much more complicated.

Understanding how a durable power of attorney works in IRS tax matters can help identify potential authorization problems before a client loses the legal capacity to address them.

What makes a power of attorney durable?

A durable power of attorney gives a designated agent, also known as an attorney-in-fact, authority to make certain decisions for the person granting the authority, known as the principal.

The important word is “durable.” The authorization remains effective if the principal later becomes incompetent. However, the document must be created while the individual still has the legal capacity to grant the authority.

Once a taxpayer becomes physically or mentally incompetent and no longer has the legal capacity to appoint a representative, creating a durable power of attorney may no longer be an option.

Can a durable power of attorney be used for IRS tax matters?

Yes, but the document must provide the necessary authority. The IRS explains that the scope of the durable power of attorney must extend to handling federal tax matters. Broad authorization may be sufficient, such as authority allowing the agent to perform any acts the taxpayer could perform if not for the taxpayer's incapacity. Ideally, the document should specifically reference federal taxes in some manner.

Not every durable power of attorney provides sufficient authority for IRS matters.

A durable power of attorney may provide broad financial authority without including all the information required for federal tax representation. If sufficient authority over federal tax matters is not included, the agent may be unable to act for the taxpayer before the IRS when that authority is needed.

Why isn't a durable power of attorney enough by itself?

Even when a durable power of attorney authorizes an agent to handle federal taxes, it may not contain all the information required for IRS representation. According to the IRS, nearly all durable powers of attorney will not specify every item required for federal tax purposes.

IRS procedural rules require a description of the tax matters covered by the authorization. That includes the type of tax, applicable tax form and specific tax years or periods.

A durable power of attorney might broadly authorize an agent to handle “all tax matters” or taxes for “all periods.” While that language may provide broad authority, it does not satisfy the IRS requirement to identify specific tax matters for representation before the agency.

This is where Form 2848, Power of Attorney and Declaration of Representative, becomes important.

How does Form 2848 work with a durable power of attorney?

If a durable power of attorney gives an agent sufficient authority to handle federal tax matters but does not contain all the information required by the IRS, the agent may complete and sign Form 2848 on the taxpayer's behalf. Form 2848 can provide the specific details missing from the durable power of attorney.

For example, the agent can identify the particular type of tax involved, such as individual income tax or a trust fund recovery penalty. The form can also identify the applicable tax years or periods and relevant forms, such as Form 1040, Form 709 or Form 8857.

This allows the durable power of attorney to provide the underlying authority while Form 2848 identifies the specific federal tax matters involved.

Form 2848 does not make an inadequate durable power of attorney sufficient. The durable power of attorney must first give the agent authority to handle federal tax matters.

What if the durable power of attorney does not provide enough authority?

The situation becomes more difficult when a taxpayer has already become incompetent and the existing durable power of attorney does not provide sufficient authority to handle federal tax matters.

The agent may need to seek appointment as a guardian or similar fiduciary. This process is typically handled through a state court and can be lengthy.

Once appointed as a fiduciary, the individual may also need to file Form 56, Notice Concerning Fiduciary Relationship, to notify the IRS of the fiduciary relationship.

This potential complication demonstrates why addressing tax authorization before incapacity can be valuable.

Help clients recognize durable power of attorney gaps early

Tax professionals are not responsible for drafting a client's durable power of attorney, but they can recognize when the document may affect future federal tax representation. If a client already has a durable power of attorney, consider whether it provides sufficient authority over federal tax matters. Even when it does, additional information may still be required before the agent can represent the taxpayer before the IRS.

When the document does not provide sufficient federal tax authority, tax pros can encourage clients to discuss the issue with the professional responsible for preparing or reviewing the document. A durable power of attorney can provide important continuity when a taxpayer becomes unable to manage their own affairs.

The key is addressing the issue while the client still has legal capacity. Careful planning is necessary to make sure an agent has sufficient authority if an IRS tax matter arises.

As a NATP member, you can count on us to provide practical information about IRS procedures and representation issues that help you identify potential problems, ask the right questions and confidently guide your clients.