When a taxpayer has knowingly failed to report income or foreign assets, the risks go far beyond penalties—they can include criminal prosecution. The (VDP) IRS Voluntary Disclosure Program offers a critical opportunity for these individuals to come forward before the IRS initiates an investigation.
For tax professionals, understanding how and when to use this program can make the difference between helping a client resolve a serious issue—or watching them face escalating legal consequences. The VDP provides a formal path to compliance, but it comes with strict eligibility rules, detailed disclosure requirements, and significant financial implications.
In this article, we’ll break down the key components of the program—from who qualifies and how the application process works, to penalty structures, foreign asset reporting requirements, and strategic guidance for navigating high-stakes disclosures with confidence.
Table of Contents
- History and evolution of the voluntary disclosure practice
- Eligibility requirements for program participation
- The two-part application process
- Penalty framework and financial impact
- Benefits of making a voluntary disclosure
- Handling foreign financial assets and FBAR requirements
- Strategic considerations for tax professionals
- Alternative compliance options for non-willful cases
- Common pitfalls and risks to avoid
- Building your firm’s VDP expertise
- Empowering your tax practice with VDP knowledge
Key takeaways
- The program offers taxpayers who knowingly violated tax laws a path to compliance, potentially avoiding criminal prosecution while resolving past non-compliance.
- Tax professionals must understand eligibility criteria, particularly between willful and non-willful violations, to recommend appropriate compliance options.
- Successful participation requires complete disclosure of all violations, cooperation with IRS examiners, and payment of taxes, interest, and penalties.
- The unified procedures cover both domestic and offshore disclosures, requiring knowledge of international reporting requirements, and FBAR obligations.
- Program penalties, while substantial, are generally less severe than those imposed during IRS-initiated enforcement actions.
History and evolution of the voluntary disclosure practice
Over decades, the IRS Criminal Investigation division has maintained the Voluntary Disclosure Program as a cornerstone of its compliance strategy. Amid high-profile tax evasion cases, this practice emerged as a pragmatic approach to encourage voluntary compliance while efficiently allocating enforcement resources.
The landscape shifted dramatically in 2009. Against the backdrop of increased scrutiny of offshore tax havens, the IRS launched its Offshore Voluntary Disclosure Program. This specialized initiative targeted unreported foreign assets, running through several iterations as the IRS refined its approach to international tax compliance.
In 2019, the IRS unveiled a streamlined process that merged domestic and offshore disclosures into a single, more efficient program. This unified approach eliminated the confusion of parallel programs, while maintaining robust mechanisms for addressing both domestic and international tax violations.
Eligibility requirements for program participation
At its core, the Voluntary Disclosure Program targets taxpayers who knowingly violated tax laws. This is not a program for innocent mistakes or oversights—those situations call for different remedies. The distinction between willful and non-willful violations stands as a crucial threshold that tax professionals must help their clients navigate.
Money laundering has no place in this program. The IRS maintains an unwavering stance: all income disclosed must originate from legal sources. Beyond maintaining program integrity, this requirement prevents the VDP from becoming a tool for legitimizing ill-gotten gains.
Timing proves critical for voluntary disclosure success. The window for participation slams shut the moment the IRS initiates a civil examination, launches a criminal investigation, or receives a tip about non-compliance from any third party. This race against the clock adds urgency to the decision-making process.
The program’s scope extends beyond individual taxpayers. Corporations, partnerships, trusts, and estates can all seek protection under the VDP umbrella, provided they meet the core eligibility requirements.
The two-part application process
The journey begins with Form 14457‘s Part I—a preclearance request that serves as the initial gateway to the program. Although clearing this hurdle does not guarantee acceptance, it represents a significant preliminary step in determining eligibility for the Voluntary Disclosure Program.
Once the IRS grants preclearance, the clock starts ticking. Applicants face a 45-day deadline to complete Part II of Form 14457, which demands exhaustive details about their tax non-compliance. This is not the time for half-measures or selective disclosure.
In the narrative section, applicants must lay bare the full extent of their willful violations. This means specifying the years involved, quantifying the amounts in question, and explaining the nature of each violation. The IRS expects—and requires—complete transparency.
Every professional representative involved in the process must submit Form 2848, establishing their power of attorney for each taxpayer, entity, and entering the program. This procedural requirement ensures proper authorization for all communications with the IRS.
The final hurdle involves review by IRS Criminal Investigation. Only after securing preliminary acceptance does the case move to a civil examiner, who guides the disclosure through its remaining phases.
Penalty framework and financial impact
The civil fraud penalty stands as the cornerstone of the VDP’s punitive framework. The IRS typically applies this 75% penalty to the tax year showing the highest liability within the disclosure period. This approach, while severe, offers more certainty than facing multiple years of penalties outside the program.
For those with undisclosed foreign accounts, the program imposes a significant FBAR penalty. This one-time assessment, based on account value, represents a compromise between full enforcement and reasonable punishment for offshore non-compliance.
Information return penalties often take a back seat in voluntary disclosures. The IRS generally shows restraint in this area, recognizing that participants are making good-faith efforts to correct past violations through official channels.
Despite their magnitude, VDP penalties pale in comparison to potential consequences of detection through IRS enforcement. Outside the program, willful violators face multiple years of penalties, possible criminal prosecution, and crushing uncertainty.
Tax professionals must prepare clients for substantial financial obligations. While full payment remains the expectation, the IRS may consider installment arrangements for those who demonstrate genuine inability to pay immediately.
Benefits of making a voluntary disclosure
For taxpayers with willful violations, the Voluntary Disclosure Program offers a critical advantage: protection from criminal prosecution. Whether the issue involves unreported income, false returns, or a consistent pattern of non-filing, the program provides a path to compliance that helps clients resolve exposure before the IRS initiates enforcement.
The structure of the program itself is another key benefit. With defined timelines, coordinated IRS review, and a formal closing agreement, taxpayers and their advisors gain a level of predictability that is rarely available once an audit or investigation begins. From a financial perspective, the program delivers certainty around penalties and interest, allowing clients to assess their full exposure and plan accordingly. While the obligations are significant, they are often less punitive than the cumulative impact of multi-year enforcement outside the VDP framework.
Finally, there’s the longer-term benefit of moving forward without uncertainty. Voluntary disclosure offers clients a clean slate, helping them re-establish compliance and avoid the stress of uresolved risk—a message that resonates deeply during advisory conversations.
Handling foreign financial assets and FBAR requirements
Foreign Bank Account Reports demand special attention in voluntary disclosures. Tax professionals must master these requirements, particularly the $10,000 threshold that triggers FBAR filing obligations for foreign financial accounts.
Each year in the disclosure period requires a separate FinCEN Form 114. These reports must capture all foreign accounts and their maximum values, creating a comprehensive picture of offshore holdings for IRS review.
The FBAR penalty structure under the VDP follows a clear formula: 50% of the highest aggregate balance across all undisclosed foreign accounts during the disclosure period. This predictable calculation helps tax professionals estimate potential penalties before entering the program.
International information reporting extends beyond FBARs. Tax firms must guide clients through a maze of additional forms—8938 for specified foreign assets, 5471 for foreign corporations, 3520 for foreign trusts, and 8621 for passive foreign investment companies.
Strategic considerations for tax professionals
Willfulness assessment
Before initiating any disclosure, conduct a thorough willfulness assessment. This critical first step determines whether clients truly belong in the VDP or might qualify for less punitive programs designed for non-willful violations.
Estimates
Financial planning demands equal attention. Tax professionals should develop detailed estimates of potential taxes, penalties, and interest before clients commit to the voluntary disclosure process. This preparatory work helps prevent unwelcome surprises later.
Time sensitivity
This cannot be overstated. The moment the IRS receives information about non-compliance—whether through whistleblowers, information exchanges, or other sources—the window for voluntary disclosure closes permanently.
Full disclosure
Partial disclosures present a dangerous temptation. Tax professionals must counsel against selective compliance, as incomplete disclosures risk program rejection and could lead to criminal investigation.
Criminal disclosure
In cases involving significant criminal exposure, partnering with specialized legal counsel becomes crucial. The attorney-client privilege may provide additional protection during sensitive phases of the disclosure process.
Alternative compliance options for non-willful cases
The Streamlined Filing Compliance Procedures offer a gentler path for truly non-willful violations. With separate tracks for domestic and foreign residents, these procedures provide a more favorable penalty framework for those who can certify their non-willfulness under penalty of perjury.
For taxpayers whose only oversight involves unfiled FBARs, the Delinquent FBAR Submission Procedures may offer the simplest solution. This program suits those who reported and paid tax on all income but failed to file required FBARs. The Delinquent International Information Return Submission Procedures address missing international forms. Taxpayers can file these returns with reasonable cause statements, potentially avoiding penalties altogether.
The certification of non-willfulness demands careful consideration. Tax firms must thoroughly explain this requirement, as false certifications can transform a simple compliance matter into a criminal issue.
Common pitfalls and risks to avoid
While the Voluntary Disclosure Program offers a path to resolution, mistakes during the process can carry significant consequences.
One of the most dangerous missteps is pursuing a “quiet disclosure.” Simply filing amended returns or late FBARs without formally entering the VDP may seem like a quick fix, but it often draws increased scrutiny. The IRS views these attempts as potential evasion and may initiate audits or criminal investigations as a result.
Incomplete or inaccurate disclosures are another major risk. The VDP requires full transparency. Omitting years, accounts, or income—whether intentional or not—can result in removal from the program and may strengthen the IRS’s position in any subsequent enforcement action.
Even after acceptance into the program, noncooperation during the civil exam phase can undermine the disclosure. Delays, inconsistent communication, or resistance to requests for documentation can erode goodwill and jeopardize the outcome.
The most effective disclosures rely on a case-by-case approach. Generic advice fails to account for the nuances of each taxpayer’s situation—timing, scope of noncompliance, asset structure, and ability to pay. A tailored strategy is essential to both qualify for the program and navigate it successfully.
Building your firm’s VDP expertise
Handling voluntary disclosures isn’t just about understanding tax law—it’s about managing risk, protecting clients, and executing under pressure. Success in this area depends on developing deep technical fluency and staying alert to shifting IRS enforcement patterns and procedural updates. Because VDP cases involve sensitive client histories and high financial stakes, ad hoc processes won’t cut it. Practices need disciplined internal systems: intake workflows that flag key risk factors early, documentation protocols that ensure completeness, and oversight procedures that catch inconsistencies before the IRS does.
Harness supports this level of sophistication with practical resources—training designed for real-world scenarios, expert guidance on gray areas, and insight into how examiners approach these cases. With the right infrastructure in place, your firm can handle complex disclosures with confidence, precision, and credibility.
Empowering your tax practice with VDP knowledge
Understanding what the IRS Voluntary Disclosure Program is—and how to navigate it—positions your firm as a trusted ally for clients facing serious tax compliance issues. Mastery of this complex program turns your practice into a resource for individuals and entities seeking to come forward before enforcement action begins.
The value of this expertise goes far beyond resolving past violations. By guiding clients through voluntary disclosure, you help them close a difficult chapter and lay the groundwork for lasting compliance and renewed financial confidence.
Ready to improve your firm’s VDP capabilities? Harness offers the tools, insight, and support to help tax professionals deliver expert guidance in high-stakes situations. Get started with a Harness tax advisor to build a practice equipped for today’s compliance challenges—and tomorrow’s opportunities.
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