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IRS Can Abate Penalties Where Taxpayer's Dementia Causes Failure to File Returns

(Parker Tax Publishing October 2016)

The IRS Office of Chief Counsel advised that late filing and payment penalties assessed against a taxpayer could be abated for reasonable cause where the taxpayer suffered from dementia when the return was prepared and filed and that the illness caused the delinquencies. The IRS stated the fact that the taxpayer appointed an individual as her power of attorney before the relevant time period would not affect an abatement decision because it was the taxpayer's duty, not the POA's, to timely file and pay her taxes. CCA 201637012.


In CCA 201637012, a taxpayer appointed an individual as her power of attorney (POA). Among other powers the taxpayer granted to the individual in the durable power of attorney was the authorization for the POA to prepare, file and sign tax income tax returns, make estimated tax payments, and to make and file gift tax returns with respect to any gifts made by the taxpayer for any year. The individual was also authorized to sign and file any claim for refund of any taxes. 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."

Certain information is redacted in the CCA, such as the year at issue and the taxpayer's age. However, at some point after the taxpayer appointed her POA, she filed an untimely income tax return which reported a tax due. The IRS assessed penalties for the late filing and late payment of tax due under Code Sec. 6651(a)(1) and Code Sec. 6651(a)(2), respectively.

The POA subsequently petitioned a state court 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 the POA and another individual as full co-guardians of the taxpayer. The state court's order characterizes the taxpayer as an "incapacitated person."

The taxpayer's attorney, citing Reg. Sec. 301.6651-1(c)(1), requested from the IRS an abatement of the penalties due to the taxpayer's mental incapacity.

Chief Counsel's Advice

The Chief Counsel's Office (IRS) advised that the first question to consider was whether the taxpayer qualifies for a First Time Abatement (FTA) under IRM A taxpayer qualifies for the FTA if the taxpayer has not previously been required to file a return or if no prior penalties have been assessed on the taxpayer in the previous three years.

If the taxpayer does not qualify for the FTA, the IRS said, then the next step was to determine whether the taxpayer had reasonable cause and did not willfully neglect to timely file her return and pay the tax due. In relation to the penalties under Code Sec. 6651(a) for failure to timely file a return and pay tax, Reg. Sec. 301.6651-1(c)(1) provides that a penalty can be abated where the taxpayer shows that the failure to file a return or pay the tax is due to reasonable cause. Reasonable cause exists where the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.

The IRS cited several cases where reasonable cause was found but noted that those cases addressed only whether a taxpayer's physical or mental disability supported reasonable cause for failure to timely file a return. However, the IRS concluded that the same analysis should apply to the penalty for failure to timely pay a tax due. The determination of whether the taxpayer suffered from dementia and was at that time not able to manage her own affairs is inherently a factual issue. Consequently, the IRS concluded that its Appeals Office will have to determine the validity of the facts as presented by taxpayer's representative.

The IRS said that the fact that the taxpayer had a durable power of attorney for the year at issue neither established nor resulted in a finding of reasonable cause for the taxpayer because the POA did not have a legal duty to file the return and pay the tax due on taxpayer's behalf. The relevant question in the instant case, the IRS said, was whether the known facts supported a determination that the taxpayer had established reasonable cause and lacked willful neglect due to her mental incapacity. The IRS noted that the applicable return filing and payment deadlines for the returns at issue occurred before the taxpayer was adjudicated incompetent. The IRS said that the Appeals Office would need facts indicating that taxpayer was incompetent when the tax return was due to be filed and the tax was due to be paid in order to determine if taxpayer had reasonable cause for her failure to timely file and pay due to her mental incapacity. That a POA was authorized to act for the taxpayer under the durable power of attorney respecting tax return filings is not relevant, the IRS said, for the year at issue.

For a discussion of the abatement of penalties for failing to file a timely return and pay the tax due on time, see Parker ¶262,127.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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