Voluntary Disclosure: Coming Clean About Previously Unreported Income

Quick overview

Voluntary disclosure is a formal or informal path taxpayers use to correct past tax filings by reporting income that was previously omitted. The goal is to become compliant before the IRS or a state tax agency discovers the omission. In practice, voluntary disclosure can reduce civil penalties and make criminal prosecution far less likely when the taxpayer acts in good faith and cooperates with the tax authorities (IRS guidance: https://www.irs.gov/tax-professionals/voluntary-disclosure-practice).

In my 15 years advising clients on tax compliance, I’ve seen prompt voluntary disclosure produce materially better outcomes than waiting for enforcement. The IRS and many states prefer cooperation; they will usually negotiate penalties and collection options when a taxpayer comes forward voluntarily and supplies complete information.

When voluntary disclosure is appropriate

• You have one or more tax years with omitted wages, freelance or self‑employment income, rental income, investment income, or foreign income.
• You have not been contacted by the IRS about those specific years or items. (If the IRS has already initiated an audit or summons, true pre‑investigation voluntary disclosure options may be limited.)
• You want to avoid criminal referral and maximize the possibility of penalty relief.

If the IRS has already opened an examination, the pathway changes: you’ll likely work within the audit and collection process rather than a pre‑filing voluntary disclosure practice (see IRS procedures: https://www.irs.gov/tax-professionals/voluntary-disclosure-practice).

How the process typically works (step-by-step)

1. Inventory the missing income. List years affected, income types (1099s, cash receipts, foreign accounts, etc.), and supporting documents (bank records, invoices, contracts).
2. Prepare amended or late returns. Most corrections use Form 1040-X for individual returns and the original return forms (e.g., Form 1120, 1065) for businesses. File all required returns for the years you’re correcting. (About Form 1040-X: https://www.irs.gov/forms-pubs/about-form-1040-x.)
3. Calculate tax, interest, and expected penalties. Interest is automatic; penalties can vary (failure-to-file, failure-to-pay, accuracy-related, and civil fraud penalties in extreme cases).
4. Consider the right disclosure vehicle. For offshore account issues, the IRS closed the old Offshore Voluntary Disclosure Program (OVDP) in 2018 and now uses Streamlined Filing Compliance Procedures or other specialized programs; consult the IRS pages on streamlined procedures: https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures.
5. Submit documentation and negotiate. If you use a formal voluntary disclosure process, you’ll provide a substantially complete set of returns and substantiate how the omission occurred. Tax professionals often negotiate penalty abatements or payment plans.
6. Resolve collection and prevention. After tax, interest, and negotiated penalties are paid or arranged, set up withholding or estimated tax payments to prevent recurrence.

What the IRS looks for and potential outcomes

• Good faith cooperation: timely, full disclosure and documentation improves outcomes.
• Whether the omission was willful: willful tax evasion can trigger civil fraud penalties (up to 75% of the underpayment) and possible criminal referral. Honest mistakes or negligent reporting generally receive lesser civil penalties.
• Statute of limitations: normally the IRS has three years to assess additional tax after a return is filed; six years if you omitted more than 25% of gross income for a year; no statute if fraud is alleged. See IRS guidance on the period of limitations (Topic No. 203): https://www.irs.gov/taxtopics/tc203.

Possible outcomes include:

• Assessment of tax, interest, and reduced penalties;
• Payment plan (installment agreement) or lien/subordination negotiations;
• Civil fraud penalties in serious cases;
• Rare criminal referral if evidence shows intentional evasion and the taxpayer did not cooperate.

Special considerations for offshore accounts and foreign income

If unreported income ties to foreign bank accounts or foreign financial assets, special programs and rules apply. The Offshore Voluntary Disclosure Program (OVDP) ended in 2018; the IRS now offers Streamlined Filing Compliance Procedures for taxpayers with non‑willful omissions and has other paths for willful conduct (see IRS international compliance pages: https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures). FinCEN requires FBAR filing for certain foreign accounts (FinCEN Form 114) and penalties for non‑filing can be severe (FinCEN: https://www.fincen.gov/report-foreign-bank-and-financial-accounts).

For offshore matters I’ve handled, taxpayers who qualify for the Streamlined Procedures — and who honestly meet the non‑willful standard — typically face lower penalty exposure than someone who appears willful or who ignored outreach from the IRS.

Interaction with state voluntary disclosure programs

Many states run their own voluntary disclosure agreements (VDAs) for unpaid state taxes, typically focused on sales tax, income tax, and withholding. If you have out‑of‑state activity or sales tax obligations, consider contacting the relevant state tax authority or using a coordinated approach. See related state programs: State Voluntary Disclosure Programs.

Practical tips to improve your outcome (professional strategies)

• Act before contact: voluntary disclosure before IRS contact is almost always better.
• Gather complete records: bank statements, invoices, contracts, and a clear timeline are invaluable.
• Use experienced counsel: a CPA, EA, or tax attorney with voluntary disclosure experience can frame the disclosure, negotiate penalties, and reduce legal risk. In my practice, having a tax attorney involved early can materially lower the risk of criminal referral.
• Consider statute limits strategically: the IRS cannot assess beyond the statute of limitations unless fraud is alleged, but full disclosure is still recommended for future compliance and peace of mind.
• Keep communications factual and avoid admissions about intent; let your advisor frame the narrative if criminal risk may exist.

Common mistakes to avoid

• Partial disclosures: disclosing only some unreported income can backfire. Full, consistent disclosure is the better approach.
• Waiting until the IRS initiates contact: an audit or summons can limit voluntary disclosure options and increase scrutiny.
• Poor documentation: weak or inconsistent records slow down negotiation and may increase penalties.

Timeline and expected costs

There’s no fixed timeline; simple cases (one or two years, good records) may take a few months. Complex cases (multiple years, offshore accounts) can take a year or more. Costs include additional taxes, interest, negotiated penalties, professional fees, and any compliance program fees. Expect interest to accrue from the original due dates until the tax is paid.

When to hire a tax attorney vs. a CPA or enrolled agent

• Hire a tax attorney when there is a realistic risk of criminal exposure or when you expect contentious negotiations with the IRS.
• A CPA or enrolled agent is appropriate for straightforward cases focused on civil penalties and preparing amended returns.
• In many complex matters I coordinate a team: a CPA for tax preparation, an attorney for legal risk, and an enrolled agent for IRS negotiations.

Related resources on FinHelp

• Our primer on the Voluntary Disclosure Program explains program variations and outcomes.
• If your issue involves offshore accounts, read What Is Voluntary Disclosure for Offshore Accounts?.
• For correcting omitted investment income specifically, see Amending Returns to Report Previously Omitted Investment Income.

Bottom line

Voluntary disclosure is a practical, often preferable path to correct previously unreported income. Acting early, documenting thoroughly, and using experienced tax professionals increases your chance of reduced penalties and lowers criminal risk. Each case is different — evaluate your facts with a qualified advisor.

Professional disclaimer

This article is educational and does not constitute legal or tax advice. It reflects common IRS practices and my professional experience but is not a substitute for personalized counsel. Consult a licensed tax professional or tax attorney who can assess your specific facts and represent you with the IRS.

Authoritative sources

• IRS — Voluntary Disclosure Practice: https://www.irs.gov/tax-professionals/voluntary-disclosure-practice
• IRS — Streamlined Filing Compliance Procedures: https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures
• IRS — About Form 1040-X: https://www.irs.gov/forms-pubs/about-form-1040-x
• IRS Topic No. 203 — Period of Limitations: https://www.irs.gov/taxtopics/tc203
• FinCEN — FBAR filing: https://www.fincen.gov/report-foreign-bank-and-financial-accounts