As the U.S. population ages, taxpayers and their representatives are increasingly confronted with the question of how to appoint a power of attorney (POA) to act on behalf of taxpayers in the event of incompetence or incapacity. When taxpayers are competent, they use a Form 2848, Power of Attorney and Declaration of Representative, for this purpose. However, an incompetent or incapacitated taxpayer is in no position to execute a Form 2848. Likewise, even a preexisting Form 2848 is usually voided if taxpayers become incompetent or incapacitated. In other contexts, individuals typically rely on various types of POA instruments to enable representation, but the IRS often will not recognize these for tax purposes. Thus, in the event of unforeseen circumstances, taxpayers can find themselves without a voice in their own tax matters beyond that of a court-appointed fiduciary.
One way of avoiding this potential pitfall is through creative and well-informed use of a durable power of attorney (DPOA). DPOAs are a common tool in the realm of estate planning and financial and medical decision-making. The key feature of a DPOA is that it remains operative or becomes effective when the principal (the individual who granted the authority) becomes incompetent or unable to act on his or her own behalf.
Tax practitioners rarely rely on DPOAs because, in their usual format, they do not authorize representation before the IRS. For this reason, individuals who have been acting on behalf of someone via a DPOA (often known as “attorneys-in-fact”) may have an unwelcome surprise when it comes to IRS representation.
Based on regulatory requirements, the Form 2848 includes information beyond a typical DPOA, such as: