IRS Form 14654: Proving Non-Willfulness

A U.S. taxpayer may discover that foreign bank accounts or a foreign corporation were never reported on prior U.S. tax returns.

The IRS Streamlined Domestic Offshore Procedures offer a path back into compliance with a 5% offshore penalty, but only if the failures were non-willful.

Eligibility depends on Form 14654 and the taxpayer’s sworn explanation of the noncompliance.

The IRS evaluates that statement under the same standards courts use to determine willfulness, recklessness, and willful blindness.

What “non-willful” means

The IRS defines the term narrowly: “Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law” (IRS, Streamlined Domestic Offshore Procedures). Everything outside that definition is willful.

Willfulness is broader than deliberate evasion. The Internal Revenue Manual treats a person as willful if he “(1) knowingly violated a legal duty; (2) recklessly violated a legal duty; or (3) acted with ‘willful blindness’ by making a conscious effort to avoid learning about a legal duty” (IRM 4.26.16.5.5.1).

Recklessness is judged objectively, and the Third Circuit held that a taxpayer is reckless when he “(1) clearly ought to have known that (2) there was a grave risk that [an accurate FBAR was not being filed] and if (3) he was in a position to find out for certain very easily” (Bedrosian v. United States, 912 F.3d 144 (3d Cir. 2018)).

The FBAR is the annual Treasury report of foreign accounts, and the Eleventh Circuit applies the same test to it (United States v. Rum, 995 F.3d 882 (11th Cir. 2021)).

What the statement must contain

Form 14654 directs the taxpayer to “Provide specific reasons for your failure to report all income, pay all tax, and submit all required information returns, including FBARs” (IRS Form 14654). It then adds: “Include the whole story including favorable and unfavorable facts.”

The form calls for the taxpayer’s “personal background, financial background, and anything else you believe is relevant.”

And the source of funds in every account, including “whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it.”

Account activity must be described, and any adviser relied on must be identified by “name, address, and telephone number” with “a summary of the advice.”

A conclusory or incomplete narrative can be costly. Form 14654 states that a submission without a factual explanation is incomplete and ineligible for streamlined penalty relief. In that event, the returns may be processed without the favorable treatment available under the Streamlined Domestic Offshore Procedures.(IRS, Streamlined Domestic Offshore Procedures).

The facts the IRS weighs

The IRS and the courts do not accept a taxpayer’s label for his own conduct. They examine the surrounding record, and the same facts recur in the guidance and the reported cases.

Points toward willfulness	Supports non-willfulness
Checking “No” on the Schedule B foreign-account question, called “a significant fact” for willful blindness and recklessness (IRM 4.26.16.5.5.1).	All income from the account was reported and the omission was an isolated oversight (IRM 4.26.16.5.5.1, example 1).
Signing returns without reading them while the foreign-account answer was wrong (Rum).	Full cooperation and complete production of account records once the issue surfaced (IRM 4.26.16.5.5.1, example 1).
Never telling the long-time accountant about the accounts, treated as “a conscious effort to avoid learning about reporting requirements” (United States v. Ott (E.D. Mich. 2020)).	Documented disclosure of the accounts and companies to the preparer, with records of the advice received.
A relative’s foreign address, nominees or layered entities that kept statements and ownership out of view (Ott).	Accounts inherited or opened while living abroad, with an ordinary purpose for each account and entity (Form 14654).
Earlier FBARs, warning letters or other prior notice followed by continued omissions (IRM 4.26.16.5.5.1).	A narrative that matches every amended return, information return and FBAR in the package.

Reliance on an adviser is not a safe harbor. In Ott the taxpayer relied on advice received as a young adult, and the court found recklessness because he never verified it with the accountant who prepared his returns (United States v. Ott).

Foreign companies need their own explanation

The certification covers every required information return, and the IRS lists “Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621” among the filings in a streamlined package (IRS, Streamlined Domestic Offshore Procedures). Form 5471, for example, reports ownership of a foreign corporation.

A statement that explains the accounts but not the company filings leaves part of the certification unsupported. Each entity should be described: when and why it was formed, who controlled it, what it owned, and what the taxpayer understood about its U.S. reporting.

Risk of an Inadequate Certification

The certification is signed under penalties of perjury. The form warns that if the IRS “receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation” (IRS Form 14654).

Streamlined returns “may be selected for audit” and checked “against information received from banks, financial advisors, and other sources” (IRS, Streamlined Filing Compliance Procedures).

A non-willful FBAR failure is “a single reporting violation,” while a willful one “can result in multiple penalties depending on the number of accounts” (IRM 4.26.16.1.7).

Taxpayers whose facts point toward willfulness are directed to “consider participating in the IRS Criminal Investigation Voluntary Disclosure Practice” (IRS, Streamlined Filing Compliance Procedures). That choice comes first, before anything is filed.

This article is for informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship with Dilendorf Law Firm. Attorney Advertising.