Using a Durable Power of Attorney rather than Form 2848

Normally, a client must sign IRS Form 2848, Power of Attorney and Declaration of Representative, to allow another individual to represent them in a tax matter with the IRS, and generally the representative (you) must also have certain professional credentials, such as a law or CPA license, or enrollment to practice before the IRS as an enrolled agent.

However what happens if the client is unable to complete and sign Form 2848 because they have become physically or mentally incompetent, and as a result, lack the legal capacity to appoint a representative?

Plan ahead.

In particular, a “durable power of attorney,” which is often used for estate planning or other purposes, can be used to overcome a legally incompetent taxpayer’s inability to complete a Form 2848.

Durable powers of attorney give a designated agent or “attorney-in-fact” authority to make healthcare and financial decisions for the individual granting the authority, aka the “principal.” The word “durable” means the authorization has staying power and will remain in effect if the principal later becomes incompetent. The durable power of attorney must, of course, be created before the person becomes physically or mentally incompetent. For a durable power of attorney to work for federal tax matters, certain specific information, required under the Internal Revenue Code and regulations, needs to be included. The requirements related to acceptance and use of durable power of attorneys in federal tax matters are stated in IRS Procedural Rule 601.503(b) (Title 26, Code of Federal Regulations (CFR), Section 601.503), which can be found in Publication 216, Conference and Practice Requirements. 

Note: By their nature, nearly all durable powers of attorney will not specify all of the required items for federal tax purposes. Notably, a description of the matter (or matters) for which the representation is authorized, including the type of tax involved (such as income tax, gift tax, or civil penalties unrelated to an income or other tax return), tax form number, and specific tax year(s) or period(s) involved.

The durable power of attorney nevertheless can still be used if the taxpayer’s appointed agent completes and signs a Form 2848 on the taxpayer’s behalf that contains the missing information. But it is crucial that the scope of the durable power of attorney extends to the handling of federal tax matters. A broad authorization will suffice (for example, authority to perform any and all acts that the principal could, but for their incapacity), though more ideally, federal taxes should be explicitly referenced in some manner in the power of attorney.

If care isn’t taken in preparing the durable power of attorney, it may not be sufficient to authorize the agent to act for the person or whoever is the appointing taxpayer, in dealings with the IRS. If so, the agent may also have to be appointed a guardian or similar fiduciary, which is typically done by a state court and can be a lengthy process. Once the agent is designated as fiduciary, they would then have to file an additional form, Form 56, Notice Concerning Fiduciary Relationship.