Dementia may support reasonable cause for late filing and payment

Plain-English summary

A taxpayer sought abatement of late-filing and late-payment additions to tax, claiming that dementia prevented her from managing her financial affairs. Chief Counsel advised the IRS to consider first-time abatement before reaching reasonable cause. If that relief was unavailable, dementia could establish reasonable cause if the taxpayer proved that she was mentally incapable during the relevant filing and payment period and that the illness caused the delinquencies. The taxpayer's earlier appointment of a durable power of attorney did not change the analysis because the duty to file and pay remained with the taxpayer, and the agent had no affirmative legal duty to do so. Appeals therefore had to determine the taxpayer's actual capacity during the relevant period.

Ruling snapshot

• Question: Could mental incapacity excuse late filing and payment, or did a power of attorney's failure defeat abatement?
• Outcome: Advice given to consider first-time abatement, then determine whether proven dementia established reasonable cause; the power of attorney was not controlling.
• Key authorities: IRC § 6651(a); Treas. Reg. § 301.6651-1(c)(1); United States v. Boyle, 469 U.S. 241 (1985).

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           memorandum
           Number: 201637012
           Release Date: 9/9/2016
           CC:PA:01: GSemasek
           POSTN-108804-16

 UILC:     6651.03-07

  date:    May 20, 2016

     to:   Skyler K. Bradbury
           Attorney
           (Small Business/Self-Employed)

  from:    Blaise G. Dusenberry
           Senior Technician Reviewer
           (Procedure & Administration)


subject:   FTF Penalty for POA Filing Late

           This Chief Counsel Advice responds to your request for assistance dated March 14,
           2016. This advice may not be used or cited as precedent.

           ISSUES

                    1.     Whether the Service should abate the additions to tax for late filing and
           failure to timely pay income tax assessed against ------------------------ (taxpayer) for her --
           ------- taxable year because she was allegedly mentally incapable of handling her
           financial affairs.

                  2.     Whether the Service should alternatively deny the request for abatement
           of the additions to tax because --------------------------------------- (POA), the individual
           whom taxpayer designated as her power of attorney during --------------, failed to fulfill
           her obligation to timely file income tax returns on behalf of taxpayer and ensure that the
           tax was timely paid.

           CONCLUSIONS

                  1.    We recommend that the Service first consider whether taxpayer qualifies
           for an abatement of the failure to file and failure to pay penalties under the First Time
           Abatement rules, as prescribed in IRM 20.1.1.3.6.1. If she does not, the additions to tax
           could be abated for reasonable cause if the Service determines that taxpayer suffered
POSTN-108804-16                                 2

from dementia during the time period when the ------- tax return was required to be
prepared and filed and the accompanying tax liability paid and that such illness caused
the delinquencies.

      2.      The fact that taxpayer appointed POA as her power of attorney before the
relevant time period is not relevant to that consideration because the taxpayer, not
POA, had a duty to timely file and pay her taxes.

FACTS

During -------------- taxpayer appointed POA as her durable power of attorney. Among
other powers the taxpayer granted to POA in the durable power of attorney, paragraph
8 authorized POA to prepare, file and sign tax income tax returns, make estimated tax
payments, and to make and file gift tax returns respecting any gifts made by the
taxpayer for any year. Paragraph 8 of the durable power of attorney also authorized
POA to sign and file any claim for refund of any taxes.

Paragraph 21 of the durable power of attorney reads, in part, “This General Power of
Attorney shall not be affected by my disability or incapacity. It is my intent that this
Power of Attorney shall be effective even if I later become disabled, or incapacitated, or
incompetent.”

Based on the information furnished to our office, taxpayer was age ---- during calendar
year ------- when her ------- Form 1040 was required to be filed. The taxpayer filed an
untimely income tax return for taxable year ------- on --------------------. The late filed
return reported tax due totaling $----------. Because of the late filing, the Service
assessed an addition to tax in the amount of $---------------pursuant to section
6651(a)(1). Similarly, because the tax due for the year was not timely paid, the Service
assessed the failure to timely pay addition to tax under section 6651(a)(2) in the amount
of $------------.

During ------------------, POA petitioned a state court in -------------------for the appointment
of an Emergency Guardian and Conservator for the taxpayer. After considering the
reports and evaluations of a court-appointed physician, a social worker, guardian ad
litem, the testimony of the taxpayer herself and other evidence, the state court
appointed POA and ---------------------------------------------------. as full co-guardians of the
taxpayer. The state court’s order of ------------------------ characterizes taxpayer as an
“incapacitated person.”

According to your request, the taxpayer’s attorney has cited Treas. Reg. section
301.6651-1(c)(1) in support of the argument that the Service should abate the additions
to tax for taxable year ------- because of the taxpayer’s mental incapacity.

You requested our views on whether the Service should abate the additions to tax
assessed against taxpayer for year ------- because her alleged lack of mental capacity
POSTN-108804-16                              3

during the relevant time period supports a finding of reasonable cause. You also asked
if the correct course of action will be to alternatively advise the Service to refuse to
abate these additions, based on POA’s responsibilities under the durable power of
attorney.

LAW AND ANALYSIS

Issue 1

First, we recommend Appeals consider whether taxpayer qualifies for First Time
Abatement under IRM 20.1.1.3.6.1.

If taxpayer does not qualify for First Time Abatement, the Service should determine
whether the taxpayer had reasonable cause and did not willfully neglect to timely file a --
------- return and pay the tax due. In relation to the additions to tax under section
6651(a) for failure to timely file a return and pay tax, the implementing regulation
provides:

    . . . If the taxpayer exercises ordinary business care and prudence and was
    nevertheless unable to file the return within the prescribed time, then the delay
    is due to a reasonable cause. A failure to pay will be considered to be due to
    reasonable cause to the extent that the taxpayer has made a satisfactory
    showing that he exercised ordinary business care and prudence in providing for
    the payment of his tax liability and was nevertheless either unable to pay the tax
    or would suffer an undue hardship (as described in § 1.6161-1(b) of this
    chapter) if he paid on the due date. . . .

Treas. Reg. § 301.6651-1(c)(1).

If the taxpayer is able to demonstrate to the Service that she was suffering from
dementia during early ------- and was therefore unable to handle her own financial
affairs, this could support a finding of reasonable cause for failure to timely file her
return. United States v. Isaac, 91-2 U.S.Tax Cas. (CCH) P 50314 (E.D. Ky. 1991),
aff’d., 968 F.2d 1216 (6th Cir. 1992)(taxpayer who suffered from chronic progressive
illness which resulted in paralysis of arms and legs and was therefore unable to attend
to his affairs demonstrated reasonable cause as defense to the addition to tax for late
filing); and see Jones v. Commissioner, T.C. Memo. 2006-176 (“[w]here a taxpayer’s
disability is raised as part of a reasonable cause defense . . . significant psychiatric
disorder and * * * [mental incapacitation] during the period under consideration . . . may
provide reasonable cause.”). Although these cases address only whether a taxpayer’s
physical or mental disability supports reasonable cause for failure to timely file a return,
the same analysis should apply to the addition to tax for failure to timely pay under
section 6651(a)(2), in the limited situation of an individual’s mental incapacity causing
him to neglect to timely pay taxes when due.
POSTN-108804-16                                         4

The determination of whether taxpayer suffered from dementia during the early part of --
------- and was at that time not able to manage her own affairs is inherently a factual
issue. Consequently, Appeals will have to determine the validity of the facts as
presented by taxpayer’s representative.


Issue 2

A power of attorney is an instrument under which an individual authorizes another to act
as his agent or attorney. Black’s Law Dictionary 1055 (5th ed. 1979); Treas. Reg.
§ 601.501, et seq. (standards for representation of taxpayers before IRS under
authority of power of attorney). Under the relevant ------------------ statute, a durable
power of attorney means that the authority conferred by the individual on another is
exercisable notwithstanding the individual’s subsequent disability, incapacity or the
lapse of time. -------------------------------. A power of attorney creates an agency
relationship between the individual and the person authorized to act on his behalf, and
agency principles are applicable in determining the authority and duties of the attorney-
in-fact. ----------------------------------------------------------------------------------------------------------
----------

Here, although after -------------------, POA was authorized to prepare, file and sign tax
returns for the taxpayer, the durable power of attorney created under -------------------------
-----------------------------------------------------------------------------------------------------------law did
not impose an affirmative legal duty on POA to prepare and timely file federal and state
tax returns on the taxpayer’s behalf. Following the taxpayer’s execution of the durable
power of attorney in ------ -------, POA became the taxpayer’s agent. --------------------------
--------- In United States v. Boyle, 469 U.S. 241 (1985), the Supreme Court opined that
Congress placed the burden of prompt filing of tax returns on the taxpayer, not on some
agent or employee of the taxpayer. The Court rejected the argument of an estate’s
executor that the estate should be excused from the addition to tax for late filing under
section 6651(a)(1) because it relied in good faith on an attorney to timely file the return.
The Court held that “[t]he failure to make a timely filing of a tax return is not excused by
the taxpayer’s reliance on an agent, and such reliance is not “reasonable cause” for a
late filing under § 6651(a)(1).” 469 U.S. at 252.

As such, the fact that taxpayer had a durable power of attorney for the year at issue
neither establishes nor results in a finding of reasonable cause for taxpayer because
POA did not have a legal duty to file the return and pay the tax due on taxpayer’s
behalf. For an example of when a guardian has a legal duty to file on behalf of a
taxpayer, see Bassett v. Commissioner, 67 F.3d 29 (2d Cir. 1995). The relevant
question here concerns whether the facts known by the Service support a determination
that the taxpayer had established reasonable cause and lacked willful neglect for the
failure to timely file her ------- return and pay her ------- taxes due to her mental
incapacity. The applicable return filing and payment deadlines for ------- occurred before
taxpayer was adjudicated incompetent. Appeals would need facts indicating that
POSTN-108804-16                              5

taxpayer was incompetent when the ------- tax return was due to be filed and the tax was
due to be paid in order to determine that taxpayer had reasonable cause for her failure
to timely file and pay due to her mental incapacity. That POA was authorized to act for
taxpayer under the durable power of attorney respecting tax return filing is not relevant
for the year at issue.

CASE DEVELOPMENT, HAZARDS AND OTHER CONSIDERATIONS

None identified.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 317-6845 if you have any further questions.