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.
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:
- Whether the Service should abate the penalties because of the alleged incapacity.
- Whether the Service should deny the request to abate because the POA failed to fulfill the taxpayer’s obligation to timely file and pay tax on behalf of the taxpayer.
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.