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James Sullivan

Did Mom File Her Tax Return?

A parent’s diminished financial capacity often leaves adult children scrambling to determine if tax returns were filed on time.

December 12, 2011
by James Sullivan, CPA, PFS

Becca’s mom, Emily, was normally a very organized person. This was especially true of her finances. Emily took pride in how well organized her finances were. Even before the death of her father, it was mom who was in control of the household finances. Becca often wondered if her mom was one of the few remaining people who still balanced her checkbook each month — by hand despite being proficient at online banking. She also kept her will and advance directives up to date and provided her children with copies. Becca had not been in her mom’s home for 11 months. On her recent visit to celebrate the holidays, Becca found her mom’s finances in disarray. Unopened mail was piled up on her desk, including overdue notices from credit card companies. Reading her mom’s checkbook Becca noticed it had not been balanced for several months. The last few entries were hard to read, looking more like a child’s scribbles than real entries. Concerned, Becca looked through more of her mom’s financial files. The most recent copies of state and Federal tax returns were from two years ago. Files for more recent years were either empty or had a few 1099s but little else.

Also included in the piles of mail were solicitations from a variety of charities. While her mom was a generous giver, most of her donations were to her church and a few select charities. Now it seemed every charity — legitimate or suspicious — had her mother’s mailing address. Becca became concerned that her mom had become an easy target for charity scams.

Financial Capacity Diminishes Early in Dementia Patients

Financial capacity is an individual’s ability to independently manage his or her financial affairs. Even a seemingly simple shopping trip to the grocery store calls on a wide range of decision-making and other financial skills.

Financial capacity is an Incidental Activity of Daily Living (IADL), i.e., what an individual needs to be capable of doing in order to live independently. In addition to financial capacity (at a minimum, keeping track of bills, income and writing checks) IADLs also include light housekeeping, simple cooking, making telephone calls, moving safely and adequately around the home, navigating stairs, using an elevator.

For individuals in the early stage of Alzheimer’s disease (or other dementias) there can be a rapid decline of financial capacity over a one-year period. This can include not only complex tasks but also simple financial skills (see “Finances in the Older Patient With Cognitive Impairment” in the Feb. 16, 2011 issue of the Journal of the American Medical Association, page 698 through 706; also see the accompanying commentary in the same issue, “Damage Prevention and Control for Financial Incapacity,” page 707). That is what Becca discovered on her trip to her mother’s home.

At first resistant to Becca’s offer to help her straighten out her finances, Emily finally relented. Becca got her mom caught up on her bills and helped her balance her checkbook. Emily, however, could not recall if she filed her state and federal income tax returns for the last two years. For assistance, Becca called her CPA.

The Role of the CPA

According to Terry Higgins, a CPA in the Chicago suburbs, Emily and Becca’s situation is not unusual. He often receives calls from adult children requesting his help to determine whether a return has been filed and if not, then assistance in filing the late returns and work with the Internal Revenue Service (IRS) to waive any penalties. CPAs, Higgins cautions, should understand the issues when taking on such assignments, such as:

  1. Issues of confidentiality. The practitioner should be familiar with the confidentiality rules of the AICPA as well as the laws regarding representing a taxpayer before the IRS. Often, Higgins says, he receives copies of past returns and IRS correspondence in the mail before properly receiving or being given permission to review the information. Without permission from the taxpayer or someone holding the taxpayer’s power of attorney (POA) for property, he has no right to review returns and correspondence. In addition, he typically does not begin an engagement without a client-signed engagement letter. That raises the question as to who will sign the engagement letter if the taxpayer is incapacitated.
  2. Determination of returns were due and not filed. Were only income-tax returns required or were gift-tax returns also due? If federal returns have not been filed, it is likely state filings were also missed unless the taxpayer lives in a state that does not impose income taxes. In addition, there may be partial year state tax returns that have to be filed if the taxpayer moved during the year. This is often the case when the family decides to move the parent closer to adult children.

    For the federal-tax return, Higgins uses the IRS Practitioner Priority Services (1-866-860-4259) to determine if a return has not been filed in prior years. If the taxpayer does not have the capacity, the person holding the property POA must sign IRS Form 2848 (PDF) Power of Attorney and Declaration of Representative. In a recent engagement, Higgins had the taxpayer’s son — who held the property POA — sign the form, which was then faxed to the IRS. This allowed Higgins to ask for and receive the information he needed regarding overdue returns.

  3. Inability to provide much guidance regarding preparation of the overdue returns due to cognitive problems. Higgins must prepare the returns as best as he can with the information available. Reviewing prior years’ returns can be a starting point, but is not error proof. To help abate any potential preparer penalties, he discloses the taxpayer’s situation fully in IRS Form 8275 (PDF) Disclosure Statement.
  4. Working with more than one family member. In these situations, if the tax information is to be shared, he files IRS Form 7216 giving him permission to share the tax return with other family members or the taxpayer’s attorney (see the AICPA article New Tax Preparer Rules for Disclosure and Use of Tax Return Information (PDF)).

Conclusion

Finally, Higgins points out that some situations are so difficult that it may be better for the CPA to walk away. This is especially true if internal family squabbling or conflict makes it difficult to obtain information. It is best, he says, to work with just one family member and let them decide how and when to share information.

An aging population presents new challenges and opportunities for CPAs and their clients. The challenge of preparing a tax return for a taxpayer with diminished financial capacity also presents an opportunity to work with family members Higgins says he may not otherwise have met. Often he ends up working on the adult children’s taxes as a result. With the challenge, he points out; there is also the reward of assisting a client and their family in a real time of need.

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James Sullivan, CPA, PFS, works with his wife, Janet, who is an elder law attorney in Naperville, IL.

* The AICPA’s PFP Section provides information, tools, advocacy and guidance to CPAs who specialize in providing tax, retirement, estate, risk management and investment advice to individuals and their closely held entities. PFP Section members, including PFS credential holders will benefit from additional resources on this topic in Forefield Advisor on the AICPA’s PFP website at aicpa.org/pfp. All members of the AICPA are eligible to join the PFP section. For CPAs who want to demonstrate their expertise in this subject matter, apply to become a PFS Credential holder.