How do voluntary disclosure programs affect FBAR and offshore reporting?
Voluntary disclosure programs (VDPs) — including the IRS Voluntary Disclosure Practice and streamlined filing compliance procedures — give taxpayers a path to correct past FBAR (FinCEN Form 114) and U.S. tax reporting omissions. When properly executed, disclosures can reduce or avoid the harshest penalties and limit the risk of criminal referral. (See the IRS guidance on FBAR and voluntary disclosure: https://www.irs.gov/individuals/international-taxpayers/foreign-bank-account-reporting-fbar; https://www.irs.gov/individuals/international-taxpayers/voluntary-disclosure-practices.)
Background
Historically, the IRS used programs like the Offshore Voluntary Disclosure Program (OVDP) to resolve offshore non-compliance. The OVDP closed in 2018; since then the IRS has relied on tailored voluntary disclosure routes (including the Criminal Investigation voluntary disclosure practice and the streamlined procedures for non-willful taxpayers). FinCEN still requires FBAR filings (Form 114) for U.S. persons with aggregate foreign account balances exceeding $10,000 at any time during the year (FinCEN/IRS guidance).
How the programs affect FBAR exposure
- Reduced civil penalties: Eligible taxpayers who come forward can often avoid the higher willful FBAR penalties (which can be as high as the greater of $100,000 or 50% of the account balance per violation) and instead face lower, negotiated civil resolutions or non-willful treatment when the disclosure shows no willfulness. The IRS distinguishes willful from non-willful conduct in enforcement and penalty assessment (IRS; FinCEN).
- Resolution of tax liabilities: VDPs typically require filing corrected or amended tax returns, paying taxes, interest, and in many cases a reduced penalty under program rules. Streamlined procedures require specified residency or non-willfulness certifications.
- Lower criminal risk: A supervised voluntary disclosure to IRS Criminal Investigation can reduce the risk of criminal prosecution when taxpayers fully cooperate and meet program criteria; it does not guarantee immunity, and eligibility rules are strict.
Who is eligible
Eligibility depends on the program:
- Streamlined filing compliance: for taxpayers whose failures were non-willful (there are separate procedures for U.S. residents and non-resident U.S. taxpayers living abroad).
- IRS Criminal Investigation voluntary disclosure: for taxpayers who may have willful misconduct but wish to seek to avoid criminal referral (requires legal counsel and strict application procedures).
- Other administrative options: in some cases, taxpayers may simply file delinquent FBARs and amend returns without formal enrollment in a VDP, but this approach has higher enforcement risk.
Practical steps to take
- Pause collection/destruction of records: preserve all records related to foreign accounts and communications.
- Determine status: assess whether failures appear willful or non-willful.
- Choose the right pathway: streamlined procedures for non-willful cases; voluntary disclosure practice for potential willfulness; or consult counsel to consider alternatives.
- File required forms: prepare and file delinquent FBARs (FinCEN Form 114) and any amended tax returns (Form 1040 and required schedules). For FBAR guidance see the FinCEN/IRS FBAR page.
- Negotiate and document settlement: pay taxes, interest, and the program penalty, if imposed.
In my practice I’ve seen timely, well-documented voluntary disclosures materially reduce client exposure — most often by avoiding willful-penalty treatment and by limiting the audit scope.
Common mistakes and myths
- Myth: “Any disclosure guarantees immunity.” False — programs may reduce penalties but do not guarantee immunity from civil penalties or criminal prosecution.
- Mistake: Filing incomplete or inconsistent records. Inaccurate or partial disclosures can trigger deeper scrutiny.
- Mistake: Trying to DIY a complicated willful case without counsel. Voluntary disclosure with potential willfulness almost always benefits from a tax attorney or experienced CPA.
Quick example
A taxpayer with multiple small foreign accounts who demonstrates non-willful failures may qualify for the streamlined procedures, file delinquent FBARs and amended returns, pay taxes and interest, and avoid large FBAR penalties. Conversely, a case with clear concealment or false records may still face aggressive penalties or prosecution without a negotiated voluntary disclosure.
Related FinHelp resources
- For a primer on reporting requirements, see our guide to Reporting Foreign Bank Accounts and FBAR Basics.
- For penalty detail, read FBAR Penalties: Consequences of Non-Compliance.
- For form specifics, review Form 114 – Report of Foreign Bank and Financial Accounts (FBAR).
Professional tips
- Act quickly: voluntary disclosure options narrow after enforcement contact.
- Document intent: contemporaneous records that show lack of willfulness improve chances under streamlined programs.
- Use specialized help: an advisor experienced in international compliance reduces errors and increases the likelihood of a favorable outcome.
Authoritative sources
- IRS — Foreign Bank Account Reporting (FBAR): https://www.irs.gov/individuals/international-taxpayers/foreign-bank-account-reporting-fbar
- IRS — Voluntary Disclosure Practices: https://www.irs.gov/individuals/international-taxpayers/voluntary-disclosure-practices
- FinCEN — Report of Foreign Bank and Financial Accounts (FBAR): https://www.fincen.gov
Professional disclaimer: This is general information, not legal or tax advice. For a case-specific plan, consult a tax attorney, CPA, or enrolled agent familiar with international-reporting issues.
