Voluntary Disclosure Programs: When to Use Them

Quick overview

Voluntary Disclosure Programs (VDPs) are structured pathways—at the federal and often state level—that allow taxpayers to fix past tax reporting mistakes by coming forward before the government uncovers the issue. Federal options include the IRS Voluntary Disclosure Practice and various international-focused procedures such as the Streamlined Filing Compliance Procedures. States run parallel voluntary disclosure agreements for unpaid income or sales taxes. When used properly, VDPs can limit civil penalties, avoid criminal referrals in many cases, and restore tax compliance.

Sources: IRS Voluntary Disclosure Practice (Criminal Investigation) and IRS Streamlined Filing Compliance Procedures (irs.gov).

When should you consider a voluntary disclosure program?

Consider a VDP when any of the following apply:

• You or your business have unreported income (domestic or foreign) and you discover it before the IRS or state tax authority sends a notice or begins an audit.
• You failed to file required foreign information returns (FBAR—FinCEN Form 114—or Form 8938) and recognize the omission only after learning of reporting requirements.
• You misclassified income, claimed incorrect credits, or otherwise materially underreported tax liability and want to limit exposure.

Key principle: voluntary disclosures work best when completed before the tax authority has actual knowledge or a specific inquiry; coming forward after a notice has arrived typically reduces or removes the protective benefits of a VDP.

Authoritative references: IRS guidance on voluntary disclosure (https://www.irs.gov/compliance/criminal-investigation/voluntary-disclosure-practice) and Streamlined Procedures (https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures).

How VDPs work — practical step-by-step

1. Internal diagnosis and scope. Identify the years involved, the type and amount of unreported income or missing information returns, and whether foreign bank accounts or assets are involved. Document what you know and what you don’t.
2. Seek professional advice. In my practice I always recommend engaging a CPA experienced in voluntary disclosures or a tax attorney before submitting anything. The wrong form or an incomplete disclosure can forfeit protections.
3. Choose the right program. For offshore issues, the IRS offers Streamlined Filing Compliance Procedures for taxpayers whose failure to report was non-willful; other taxpayers might apply under the broader Voluntary Disclosure Practice. States have their own VDPs—see state guidance. (See interlinks below.)
4. Prepare full disclosure packet. That normally includes amended or delinquent tax returns for the relevant years, information returns (e.g., FBARs), an explanation of the circumstances, supporting documentation, and payment or a proposed payment plan for taxes and interest.
5. File and follow the program rules. Some programs require pre-clearance or a specific submission format. Retain detailed records of what you send and when.
6. IRS/state review and outcome. The tax authority will review for completeness and determine penalty relief or other terms. In many cases you’ll still owe tax and interest; some penalties may be reduced or waived if the program’s criteria are met.

Practical note from my experience: gathering bank records and a timeline before you contact a professional shortens the process and reduces the chance of costly errors.

Who is eligible and who isn’t

Eligibility varies by program. Typical patterns:

• Eligible: taxpayers who act before a specific audit, investigation, or notice; non-willful foreign account failures qualifying for Streamlined Procedures; businesses wanting to correct reporting that was not fraudulent.
• Not eligible: taxpayers already under civil audit or criminal investigation for the same issues; those with evidence the noncompliance was willful for programs limited to non-willful disclosures.

Note: the now-closed Offshore Voluntary Disclosure Program (OVDP) that operated before 2018 is not available; taxpayers with older offshore issues should review current Streamlined or Voluntary Disclosure Practice options (IRS announcement and program closure details are public on IRS.gov).

Benefits and trade-offs

Benefits

• Reduced or eliminated specific penalties if program conditions are met.
• Lower risk of criminal referral for many taxpayers who meet voluntary disclosure requirements (but not a guaranteed shield in all cases) (IRS Voluntary Disclosure Practice).
• Restores compliance and reduces long-term legal risk.

Trade-offs

• You will almost always pay back taxes, interest, and sometimes reduced penalties.
• The IRS or state may require additional documentation and negotiation.
• Full disclosure becomes a permanent record with tax authorities.

Common mistakes and pitfalls

• Waiting until you receive an IRS notice. A disclosure made after the IRS has actual knowledge usually loses VDP protections and may trigger larger penalties.
• Self-submitting incomplete disclosures without professional review. Incomplete paperwork or admissions can increase exposure.
• Assuming one-size-fits-all. Offshore issues, missed FBARs, payroll or sales tax errors, and state tax liabilities can require different programs or agreements.

Costs and penalties: what to expect

There is no single fee for a VDP. Expect to pay:

• Back taxes and statutory interest for the relevant years.
• Program-specific reduced penalties (or standard penalties if you don’t qualify for reduced treatment).
• Professional fees for CPAs, tax attorneys, or enrolled agents.

Example: under Streamlined Procedures, qualifying taxpayers may avoid accuracy-related penalties or willful FBAR penalties but still must pay taxes and interest for the years involved (see IRS Streamlined Filing Compliance Procedures).

State-level voluntary disclosure programs

Many states operate voluntary disclosure programs for unpaid state income, sales, or use taxes. Terms and protections differ by state—some waive penalties or offer limited look-back periods. If your issue involves state tax, don’t assume federal enrollment covers state exposure; review the state’s VDP and consider dual submissions where appropriate. FinHelp’s overview of State Voluntary Disclosure Programs provides a state-focused checklist and links.

Real-world scenarios (anonymized)

• Foreign-account reporting: a retired couple discovered decades of missed FBARs after a financial review. Under Streamlined Procedures they filed amended returns and FBARs, paid back taxes plus interest, and avoided criminal exposure because the IRS found their noncompliance non-willful.
• Small business misreporting: a business owner corrected misclassified contractor payments before an audit. The state VDP reduced penalties and limited the look-back period, lowering the total exposure.

These cases reflect outcomes I’ve seen as a CPA: speed, documentation, and the right program selection shape results.

Practical checklist before you act

• Stop and gather records: tax returns, bank statements, ledgers, and foreign account statements.
• Consult a specialist (CPA or tax attorney) with voluntary disclosure experience.
• Don’t sign or file admissions without counsel.
• Ask whether the issue is likely non-willful (makes Streamlined options possible) or might be treated as willful.
• Coordinate federal and state disclosures where relevant.

Further reading and authoritative resources

• IRS Voluntary Disclosure Practice (Criminal Investigation): https://www.irs.gov/compliance/criminal-investigation/voluntary-disclosure-practice
• IRS Streamlined Filing Compliance Procedures: https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures
• FinHelp articles: Voluntary Disclosures: When and How to Report Past Noncompliance, How Voluntary Disclosure Programs Can Resolve Offshore Account Issues

Professional disclaimer
This article is educational and not individualized tax advice. Every taxpayer’s facts are different. Consult a licensed CPA or tax attorney before starting a voluntary disclosure. IRS rules and program details can change; check IRS.gov or your tax advisor for current guidance.

Author note: In my 15+ years helping clients with disclosure matters I’ve found that starting the process early and working with experienced counsel produces the most favorable outcomes—both financially and in terms of future tax certainty.