IRS Clarification on Non-Willful Conduct Certification for Streamlined Offshore Compliance Procedures: Revisions to IRS Forms 14654 and 14653

Many U.S taxpayers are often surprised to discover that they have a U.S. tax reporting obligation on financial accounts or assets held overseas. Once they discover their obligation, there are a number of programs through which they can become compliant with their U.S. tax reporting obligation.

One option, if the taxpayers meet the requirements, is to submit either IRS Form 14654 or IRS Form 14653 for the Streamlined Domestic Offshore Procedures or the Streamlined Foreign Offshore Procedures, respectively. These forms require U.S. taxpayers to certify that their prior non-compliant conduct was non-willful. However, not much guidance exists regarding what information is needed as part of this certification. A recent change by the IRS to these forms has provided some clarity.

Background

Under the 2014 Offshore Voluntary Disclosure Program (OVDP), streamlined filing compliance procedures permit taxpayers to become compliant with their U.S. tax reporting obligations. If taxpayers meet the requirements, they benefit from a significantly reduced miscellaneous penalty structure under the streamlined procedures. The Streamlined Domestic Offshore Procedures provide a miscellaneous penalty of 5 percent for U.S. taxpayers residing in the United States.[1] Under the Streamlined Foreign Offshore Procedures, a taxpayer who complies with all of the requirements may be able to avoid penalties altogether.[2] This is much more favorable than the 27.5 percent and 50 percent civil penalties generally offered under OVDP.[3]

Non-Willful Conduct Certification

In order for taxpayers to qualify for such preferable penalty treatment, they must meet several criteria. One critical criterion is that taxpayers must establish – to the satisfaction of the IRS – that their non-compliant behavior was non-willful. Non-willful conduct is defined as “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”[4]

Depending on where the U.S. taxpayer resides, certification of non-willful behavior may be made on one of the following forms initially released by the IRS in August 2014:

For U.S. taxpayers residing in the U.S. – IRS Form 14654: Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures.
For U.S. taxpayers residing Abroad – IRS Form 14653: Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures.
This certification may also be made as a separate statement. In either case, the taxpayers must make this certification under penalty of perjury.

Recent Clarification: Providing a Non-Willful Conduct “Narrative” Statement

When the newly revised streamlined procedures were announced on June 18, 2014, the initial streamlined procedures forms required a non-willful conduct certification by the U.S. taxpayers. However, determining the expectation of the IRS regarding the level of information to be included in the non-willful certification was unclear.

In January 2015, IRS Forms 14654 and 14653 were updated to provide taxpayers with more clarity on what is required to successfully establish non-willful conduct. In particular, the IRS is looking for a “narrative” with specific facts regarding the taxpayer’s non-willful conduct.

Providing the reasons behind the taxpayer’s conduct is also required. In a conversation with an IRS Revenue Agent, the author was told that the IRS wants to know the “why” behind the non-willful conduct. Importantly, the IRS has added new language to both forms stating “Any submission that does not contain a narrative statement of the facts will be considered incomplete and will not qualify for streamlined penalty relief.”

While the IRS does not communicate their meaning of “narrative,” the Oxford Dictionary defines it to be “A spoken or written account of connected events; a story.” Therefore, taxpayers should strive to create a non-willful conduct narrative that is clear, concise, and, of course, truthful. It should lead the reader, who happens to be an IRS Agent, through the events that occurred and factually describe the non-willful behavior of the taxpayer. A well-constructed narrative which clearly and honestly demonstrates the taxpayer’s non-willful conduct is particularly significant in light of the fact that a submission under the Streamlined Filing Compliance Procedures precludes the taxpayer from later participating in OVDP if their Streamlined submission is rejected by the IRS.[5]

There is no preferred or sample narrative structure from the IRS, so taxpayers have some flexibility with the format. Structure often helps and taxpayers may wish to consider writing the narrative chronologically or thematically. If thematically, it is not uncommon for more than one theme to apply to a taxpayer’s non-willful conduct. Taxpayers should consider their individual situations and include any relevant themes since each taxpayer is unique. Importantly, taxpayers should always bear in mind that they sign their non-willful conduct certification narrative under penalties of perjury.[6]

For instance, one potential theme may include that the taxpayers are relatively new residents of the U.S. and previously unaware of the U.S. requirement to report all worldwide income. The taxpayer would then expand upon that theme with pertinent facts explaining the reasons why they were unaware of this requirement. Another theme which may apply may be the taxpayers’ reliance on professional advisors, including a former tax preparer. In such a case, the guidance from the IRS remains the same as it was on the initial forms: taxpayers who assert reliance on a professional advisor must submit the name, address and telephone number of the advisor as well as a summary of the advice that was given.

IRS Forms 14654 and 14653 Are Expandable

Similar to before the January 2015 clarification by the IRS, married taxpayers submitting a joint certification should provide their individual reasons on the certification if they are different. Also as before, the IRS forms are expandable and can accommodate any length of narrative provided by the taxpayers. Taxpayers have plenty of space on IRS Forms 14654 and 14653 to provide as much relevant information as necessary to assert their non-willful conduct. Taxpayers may also use this expandable space to identify to the IRS the steps they have taken to bring themselves into compliance with U.S. tax laws.

[1] See “U.S. Taxpayers Residing in the United States,” Page Last Reviewed or Updated: 09-Oct-2014, http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States, last accessed February 26, 2015.

[2] See “U.S. Taxpayers Residing Outside the United States,” Page Last Reviewed or Updated: 09-Oct-2014, http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States, last accessed February 26, 2015.

[3] For more information about qualification requirements under the Streamlined Offshore Procedures, please see our previously posted blog article “The IRS Announces Sweeping Changes To Its Offshore Voluntary Disclosure Programs New Rules Effective July 1, 2014,” Morris N. Robinson, Esq., July 16, 2014, The Massachusetts Tax Alert ® Blog.

[4] IRS Forms 14654 and 14653 (rev. 1-2015).

[5] See “Streamlined Filing Compliance Procedures,” Page Last Reviewed or Updated: 09-Oct-2014, http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures, last accessed February 25, 2015.

[6] Under IRC § 7206, generally, if any person is found to have willfully made a false statement under penalty of perjury, they may be found guilty of a felony, and if convicted, fined not more than $100,000 or imprisoned not more than 3 years or both (along with the costs of prosecution).