What Are Voluntary Disclosure Programs and How Do They Work?
Voluntary Disclosure Programs (VDPs) are formal or informal pathways that let taxpayers come forward to correct past tax or reporting failures before the government initiates enforcement. The goal of these programs is to encourage compliance while reducing enforcement costs and the risk of criminal charges for taxpayers who act voluntarily and in good faith. The IRS describes its voluntary disclosure practice and related options on its website (IRS, Voluntary Disclosure Practice: https://www.irs.gov/individuals/international-taxpayers/voluntary-disclosure-practice).
In my work as a CPA and CFP®, I’ve helped clients evaluate whether a voluntary disclosure makes sense. In many cases, disclosure reduces uncertainty and legal risk. But VDPs are not a one-size-fits-all fix: program rules, documentation requirements, and penalty treatments vary by the type of noncompliance (domestic returns, FBARs, offshore assets, etc.).
Key IRS references and related programs:
- IRS Voluntary Disclosure Practice (general guidance): https://www.irs.gov/individuals/international-taxpayers/voluntary-disclosure-practice
- Streamlined Filing Compliance Procedures (for non-willful offshore noncompliance): https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures
- FBAR reporting and penalties (FinCEN/Form 114 background): https://www.irs.gov/individuals/international-taxpayers/foreign-bank-and-financial-accounts-reporting
I also recommend reading our related guides on Form 114 — Report of Foreign Bank and Financial Accounts (FBAR) and the Streamlined Foreign Offshore Procedures for practical steps specific to international reporting.
Background: How VDPs Evolved
Historically, the IRS has used targeted programs to encourage taxpayers to come forward — most notably the Offshore Voluntary Disclosure Program (OVDP), which closed to new submissions in 2018. After OVDP ended, the IRS shifted emphasis to the Streamlined Filing Compliance Procedures and case-by-case voluntary disclosure practice, focusing on distinguishing willful from non-willful conduct and tailoring outcomes accordingly (IRS guidance).
The modern approach recognizes that many noncompliance cases arise from complexity or oversight rather than concealment. That’s why the Streamlined Procedures offer a lower-penalty path for eligible taxpayers who certify non-willful conduct and meet specific eligibility requirements.
Who Is Eligible — and Who Is Not?
Eligibility depends on the program and the facts: type of tax or report omitted, whether the omission appears willful, and whether the taxpayer has had prior IRS contact. Common categories:
- Individuals or businesses with unfiled income tax returns or unreported income (domestic VDPs or general voluntary disclosure).
- U.S. persons with foreign financial accounts who did not file FBAR/Form 114 or Form 8938 (FATCA-related) — may qualify for Streamlined Procedures if non-willful.
- Taxpayers who have not yet been contacted by the IRS or under criminal investigation are more likely to qualify for favorable voluntary disclosure terms.
If the IRS already opened an audit or criminal investigation, the available options narrow and outcomes are less favorable. In short: disclosure before the IRS finds the issue typically yields the best options.
Typical Steps in a Voluntary Disclosure
- Initial assessment: Determine scope of noncompliance and estimate tax, penalties, and interest. This usually requires reconstructing records for multiple years.
- Professional consultation: Engage a CPA, tax attorney, or enrolled agent experienced with disclosures. In my practice, early documentation review reduces back-and-forth with the IRS.
- Choose the path: Decide whether to use Streamlined Procedures, a formal voluntary disclosure submission, or to file amended returns and FBARs without asking for relief.
- Prepare and file returns/forms: This can include amended returns (Form 1040X), delinquent FBARs (FinCEN Form 114), Form 8938, and explanatory statements.
- Submit penalty relief requests or certifications: For Streamlined, submit the required certification of non-willfulness and the delinquent or amended returns. For other VDPs, follow program-specific submission protocols.
- Pay liabilities: Pay tax, interest, and any agreed-upon penalty. The IRS may negotiate penalty terms in a voluntary disclosure setting.
- Monitor outcome: The IRS may accept, counteroffer, or request additional documentation. Expect this phase to take months, sometimes longer for international cases.
Pros and Cons: What to Expect
Pros
- Reduced criminal risk: Timely voluntary disclosure can substantially reduce the chance of criminal referral.
- Potential penalty mitigation: Programs like the Streamlined Procedures can eliminate certain penalties if eligibility is met.
- Control and closure: You regain control over the compliance narrative and can negotiate terms rather than react to enforcement.
Cons
- Costs: Professional fees for reconstruction, legal review, and representation can be significant.
- Not guaranteed leniency: Penalty relief depends on facts — willful conduct can still lead to large penalties or prosecution.
- Disclosure becomes part of the tax record: Once filed, the IRS has the information and may audit or reassess additional years.
Real-World Outcomes and Examples
Example 1 — Non-willful offshore omission (Streamlined): A U.S. citizen living abroad failed to report small foreign interest and did not file an FBAR. We used the Streamlined Filing Compliance Procedures: they filed amended returns and delinquent FBARs and paid tax and interest but avoided FBAR penalties. The IRS accepted the submission.
Example 2 — Late FBARs without disclosure: A small-business owner ignored FBAR filing for years. After voluntary contact and professional help, we reconstructed accounts and used a voluntary disclosure path to avoid criminal referral and negotiate penalty reductions. Timing was critical — acting before IRS contact improved outcomes.
These examples show a consistent theme: early, accurate, and well-documented disclosures tend to produce the best outcomes.
Common Mistakes and How to Avoid Them
- Waiting until after an audit or notice — this often disqualifies the best VDP options.
- Attempting to self-navigate complex international filings without expert help — mistakes in Form 114 or Form 8938 can trigger larger problems.
- Failing to assemble full documentation — incomplete disclosures lead to follow-up, delay, or adverse determinations.
Practical tip: If you have foreign accounts, review our primer on Form 114 — FBAR and the Streamlined Foreign Offshore Procedures to identify potential next steps.
Penalties, Timing, and Costs
Penalties vary widely by program and whether conduct is willful. FBAR penalties, for example, can be severe for willful violations; non-willful cases may be eligible for relief under Streamlined Procedures (see IRS FBAR guidance). The IRS updates fines and guidance periodically; always consult current IRS pages and a professional for precise exposure estimates.
Professional fees for a typical voluntary disclosure engagement can range from a few thousand dollars for straightforward domestic cases to tens of thousands for complex offshore matters that require multiple years of reconstruction, foreign counsel, or litigation support.
Alternatives to Voluntary Disclosure
- File delinquent returns and forms without requesting formal relief (some taxpayers choose this when the omission is small and not willful).
- Wait for audit? Not recommended — reactive approaches usually yield worse outcomes.
- Seek penalty abatement or offer-in-compromise after filing — possible, but less certain than prospective voluntary disclosure avenues.
Frequently Asked Questions
Q: Will the IRS always reduce penalties if I disclose?
A: No. Penalty relief depends on program rules and your facts. For non-willful offshore cases, the Streamlined Procedures can eliminate penalties in certain situations. For willful conduct or if the IRS already has a contact, relief is less likely (IRS guidance).
Q: Does disclosure prevent criminal prosecution?
A: Voluntary disclosure reduces the likelihood of criminal referral when truly voluntary and complete, but it does not guarantee immunity. Only the IRS or Department of Justice can decide prosecution.
Q: How long does the process take?
A: From several months to more than a year, depending on complexity, documentation needs, and whether foreign institutions are involved.
Practical Next Steps (Checklist)
- Don’t ignore the problem. Start by collecting bank statements, prior tax returns, and correspondence.
- Get professional help early — a CPA or tax attorney with disclosure experience will save time and reduce risk.
- Decide which program fits your facts: Streamlined, other voluntary disclosure practice, or simply filing amended returns.
- Prepare and submit accurate filings with full documentation and certifications where required.
- Budget for tax, interest, penalties (if any), and professional fees.
Sources and Further Reading
- IRS, Voluntary Disclosure Practice: https://www.irs.gov/individuals/international-taxpayers/voluntary-disclosure-practice
- IRS, Streamlined Filing Compliance Procedures: https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures
- IRS, FBAR and foreign account reporting: https://www.irs.gov/individuals/international-taxpayers/foreign-bank-and-financial-accounts-reporting
- FinHelp glossary: Form 114 — FBAR and Streamlined Foreign Offshore Procedures
Professional Disclaimer
This article explains general concepts about Voluntary Disclosure Programs and is not legal or tax advice. Your facts matter. Consult a qualified tax professional or attorney experienced in voluntary disclosures and international tax before taking action.
Final Thought
Voluntary Disclosure Programs give taxpayers a path to correct past mistakes and reduce legal exposure. The best outcomes come from early action, full documentation, and experienced representation. If you suspect past noncompliance, start gathering records and consult a professional promptly.