Overview

Voluntary Disclosure Programs (VDPs) are structured paths for taxpayers to come forward and correct past tax reporting errors. The IRS and many state tax agencies offer these programs to encourage compliance and resolve issues that range from missed income to improper foreign-asset reporting. The goal for the agency is to secure unpaid taxes and for the taxpayer to minimize penalties and avoid prosecution when possible. See the IRS guidance on voluntary disclosure for more detail: https://www.irs.gov/individuals/understanding-voluntary-disclosure and https://www.irs.gov/individuals/international-taxpayers/voluntary-disclosure-what-you-need-to-know (IRS).

This article explains when to consider a VDP, who’s eligible, the typical steps I use in client engagements, alternatives (including amended returns), and practical tips to improve outcomes. It is educational and not individualized tax advice—consult your CPA or tax attorney before acting.

When to consider a VDP: clear signals

Consider a voluntary disclosure when one or more of the following apply:

  • You have material unreported income (e.g., significant freelance, rental, or investment income) across multiple years.
  • You hold foreign financial accounts or offshore assets that weren’t properly reported (FBAR/Forms 8938 issues).
  • The omission or error could be viewed as willful by the IRS (criminal exposure), or there’s a risk the issue will be referred to Criminal Investigation.
  • You discover an error but the IRS has not contacted you about it; you can realistically assemble accurate records to correct multiple years.
  • You want to avoid cascading enforcement steps such as summonses, liens, or levies that often follow an audit-triggered discovery.

If instead the issue is a small math error, a one-time missed credit, or a clerical omission, filing an amended return (Form 1040-X) may be a faster fix. For step-by-step help with amended returns, see our guide: “Step-by-Step Guide to Filing Form 1040-X (Amended Return)” (https://finhelp.io/glossary/step-by-step-guide-to-filing-form-1040x-amended-return/).

Who is eligible and important exclusions

Eligibility varies by program and jurisdiction. The IRS’s current framework treats voluntary disclosure requests seriously but also screens for ineligibility. Common eligibility considerations:

  • In general, taxpayers who come forward before the IRS has initiated an examination or investigation stand a better chance of favorable terms.
  • Taxpayers who can provide a complete, accurate disclosure covering all affected years are more likely to be accepted.
  • Willful criminal conduct is the key limit. If the facts suggest ongoing criminal behavior or the taxpayer has previously been warned, the IRS may decline the request and refer the matter to the Criminal Investigation division.

Notably, the Offshore Voluntary Disclosure Program (OVDP) that offered large-amnesty-style terms was closed in 2018; current channels are handled through the IRS’s voluntary disclosure practice and separate civil and criminal processes (IRS). For international issues, consult the IRS international voluntary disclosure pages: https://www.irs.gov/individuals/international-taxpayers/voluntary-disclosure-what-you-need-to-know.

The typical voluntary disclosure process (practical roadmap)

In my practice I follow a disciplined five-step approach before submitting a voluntary disclosure:

  1. Triage and risk assessment
  • Determine materiality of the issue, possible criminal exposure, and state nexus.
  • Check statute of limitations and whether the tax years remain open for assessment.
  1. Document assembly
  • Pull W-2s, 1099s, bank statements, brokerage records, partnership K-1s, and any foreign account statements.
  • Reconstruct income and expense items so you can compute corrected tax liabilities for each year.
  1. Decide the disclosure vehicle
  • For most U.S.-situated errors, a civil voluntary disclosure or amended returns may suffice.
  • For international matters, the voluntary disclosure practice has specific procedures and often begins with a pre-clearance or voluntary disclosure submission through counsel.
  1. Prepare and submit the disclosure
  • File corrected returns (or amended returns where appropriate) and include a thorough statement explaining the omission, amounts, and corrective steps.
  • When counsel is involved, many clients use a voluntary disclosure letter to the IRS criminal division prior to filing returns; this can protect privilege and set the record that the taxpayer acted in good faith.
  1. Negotiate outcome and comply with remediation
  • Expect negotiation on penalties and payment options. Interest on unpaid tax generally still applies, though some penalty relief is often available under negotiated terms (IRS).

Timing matters: coming forward before the IRS knows about the issue is typically the best path to the most favorable outcome. If the IRS has already issued a notice or is auditing, voluntary disclosure options narrow.

Benefits and downsides

Benefits

  • Reduced risk of criminal prosecution when the disclosure is timely and complete (though not guaranteed).
  • Potentially lower penalties and a clearer path to ending uncertainty and future audits.
  • Opportunity to negotiate payment plans or to limit collateral consequences (state referrals, professional-license risks).

Downsides

  • You must generally pay the underlying tax and interest; only penalties are often reduced.
  • Disclosure may trigger state tax liability or additional audits in linked jurisdictions.
  • The process can be time-consuming and may require legal counsel and accounting reconstruction costs.

Alternatives to a VDP

  • File amended returns (Form 1040-X) where the mistake is isolated and low-risk; this is often faster and less intrusive. See our article: “How Amended Returns Affect Your Refund or Balance Due” (https://finhelp.io/glossary/how-amended-returns-affect-your-refund-or-balance-due).
  • Request penalty abatement for first-time errors—if you have a previously clean compliance history, the IRS may grant relief without a full disclosure program.
  • Negotiate directly during an audit if the IRS discovers the error, though leverage is usually lower once the IRS is investigating.

Real-world examples (anonymized)

Example 1 — Small business revenue omission
A sole proprietor missed reporting a consistent revenue stream from a side contract over three years. After a risk assessment, we prepared corrected returns for the three years, submitted a voluntary disclosure before any IRS contact, and negotiated a penalty reduction. The client paid tax, interest, and a negotiated civil penalty that was materially lower than the statutory maximum—saving thousands and removing the risk of criminal referral.

Example 2 — Foreign account reporting
A client inherited accounts abroad and misunderstood FBAR and Form 8938 thresholds. We used the voluntary disclosure practice, reconstructed account histories, and coordinated with counsel. The outcome avoided criminal exposure; civil penalties were assessed in line with current IRS practices but were lower than what aggressive enforcement could have produced.

Practical tips I use for clients

  • Move quickly but don’t rush: gather accurate records first. Incomplete disclosures can backfire.
  • Use experienced professionals: a CPA plus tax attorney is often the right team—CPA to compute liabilities, attorney to manage privilege and interactions with Criminal Investigation if needed.
  • Coordinate state filings: state tax agencies sometimes run separate VDPs or will accept federal disclosures; failing to notify states can lead to new exposure.
  • Expect interest: the IRS expects payment of tax and interest even if penalties are negotiated down.

Frequently asked questions

Q: Will I still owe interest and penalties after a voluntary disclosure?
A: Yes. Tax and interest must typically be paid; penalties may be reduced or negotiated but are rarely eliminated entirely (IRS).

Q: Is voluntary disclosure confidential?
A: No absolute confidentiality exists. While voluntary disclosure can reduce criminal referrals, information may be shared within IRS components and with state agencies.

Q: Can I do this without a tax attorney?
A: You can, but for cases with potential criminal exposure or foreign reporting issues, engaging an attorney and CPA is strongly recommended.

Authoritative sources

Professional disclaimer

This article is educational and reflects my experience as a CPA and CFP advising clients on tax compliance. It is not individualized tax or legal advice. Because voluntary disclosure rules change and outcomes depend on specific facts, consult a qualified tax attorney or CPA before making disclosure decisions.

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If you’d like, I can help outline the documents and a timeline you’ll need for a voluntary disclosure based on a specific scenario.