IRS Voluntary Disclosure Practice

If you have willfully failed to report income or made other potentially criminal errors in regard to your taxes, you may want to look into the Voluntary Disclosure Program (VDP). The IRS Voluntary Disclosure Program (VDP) offers taxpayers who have willfully failed to comply with tax laws a crucial opportunity to avoid criminal prosecution while rectifying their obligations. 

By proactively disclosing their violations, individuals can resolve unreported income, undisclosed offshore accounts, or hidden cryptocurrency gains before the IRS detects them. The program allows taxpayers to mitigate severe legal and financial consequences while fulfilling their tax responsibilities.

Unfortunately, a voluntary disclosure does not guarantee immunity, but the IRS will consider all of the facts you provide and determine if your tax problems can be resolved. A tax attorney can help you achieve the best results possible.

What is Voluntary Compliance?

The U.S. tax system is built on voluntary compliance. In other words, taxpayers are expected to voluntarily file honest and complete tax returns and pay their tax due accordingly. The self-reporting nature of the U.S. tax system requires individuals and businesses to calculate taxable income, claim any deductions and credits, and pay the appropriate taxes to the IRS. 

Voluntarily sharing honest information with the IRS means that if you are selected for an audit, you should easily be able to back up the information on your tax return. However, if you fail to file or file a return with false information and you are selected for an audit, you may face penalties, interest, and even criminal prosecution.

But, what if you realize that you haven’t filed a return or that you forgot important information on your return? In some situations, you may be able to rectify the situation by voluntarily filing an amended return, but if willful incompliance was involved, you may need to look into the IRS’s Voluntary Disclosure Program. 

What is the IRS Voluntary Disclosure Practice?

The Voluntary Disclosure Program (VDP) is a pathway for taxpayers who have willfully violated U.S. tax laws to come forward and rectify their non-compliance. Administered by the IRS, the program provides a structured, formal process for individuals and businesses to disclose previously unreported income, underpayment of taxes, or failure to disclose offshore accounts and assets. By voluntarily approaching the IRS before detection by the agency happens, taxpayers can significantly reduce the risk of criminal prosecution, which is a key incentive for participation. 

The program requires complete transparency, cooperation, and submission of all relevant financial records, often covering up to six years of tax cycles. While participants remain subject to civil penalties—including accuracy-related penalties and failure-to-file fines—participating in the VDP can lighten the harshest consequences, such as fraud penalties or potential prison sentences.

Who Can Make a Voluntary Disclosure?

Any individual, business, or estate that has intentionally failed to comply with tax laws may participate in the VDP. The biggest distinction to know if you should take advantage of the VDP route is that you intentionally disregarded tax law and not merely made a mistake when filing taxes with the IRS. 

If you feel that you made a mistake on a past return you may decide to file an amended or past-due return instead of pursuing the VDP. Additionally, those who earn money from a business from an illegal business source may not participate in the VDP.

Some examples of eligible taxpayers/transactions:

• Unreported cryptocurrency transactions.
• Business owners with off-the-books income.
• Individuals with unreported foreign inheritance.
• Real estate transactions not reported.
• Gambling winnings or prior intentional tax evasion.
• Unreported offshore assets.
• Underreporting income.

What is a Timely Disclosure? Why is it Important?

The IRS requires a “timely disclosure” which simply means that you must contact the agency before they contact you. You cannot participate in this program if you are under audit or investigation for the issue or tax year you want to disclose.

By coming forward before the IRS learns of your non-compliance, you have a chance to avoid the most severe of penalties. This timely disclosure ensures that you have the opportunity to come clean before the IRS can impose sanctions. 

This timeliness is crucial for you to qualify for the VDP program because once an audit or criminal investigation is initiated by the IRS, there is no way to avoid escalation of IRS actions, including criminal prosecution. If you fail to report income such as wages, 1099 income, gains from cryptocurrency, and business income, the IRS may catch you through their matching process.

If the IRS already has you under audit or you are currently under investigation for discrepancies in your taxes, it is too late for you to use the VDP process. Once the IRS contacts you about your tax non-compliance, you are ineligible for the program. 

Third-party notification to the IRS also makes you ineligible. This could come in the form of a whistleblower, an employer, a financial institution, or a governmental agency. Additionally, if you are investigated through a criminal enforcement action and you are referred to the IRS for investigation, you may not use the VDP process.

How to Make a Voluntary Disclosure

Gathering some initial documentation is the first step to starting the VDP process. IRS Form 14457 is the document you send to the IRS and it outlines the necessary information that you will need to provide to get started. 

Part I of IRS Form 14457 is a request for preclearance to enter into the program. You will disclose information identifying yourself, any business entities you controlled related to your non-compliance, and a list of all of your financial accounts, including digital assets. You’ll also include the tentative years in which the noncompliance took place.

Once you submit the form with Part I completed, IRS Criminal Investigation (CI) will review the information given in IRS Form 14457 and determine if you are pre-cleared to continue to the next stage. If you are approved to enter the program, CI will send you a Preliminary Acceptance Letter and your information will be forwarded to a civil section of the IRS.

What to Expect After Filing IRS Form 14457

Once you have received a preclearance letter, you will have 45 days to complete Part II of the form and submit the required information and documentation to CI. The second part of the form requires you to submit a narrative that is a complete picture of the willful noncompliance on your part. 

You will need to cooperate with the IRS at every step and provide the documentation within the 45-day timeframe you are given to do so. If you need extra time to provide the information, you may ask for a 45-day extension to do so. If you are unable to give the information or documentation during that time frame, you will not be able to use the VDP process and your application will be rejected.

Once Parts I and II have been accepted and your form has been approved, you are expected to pay your obligation in full, including the amount of tax and penalties based upon a prepared delinquent (or amended) return. If you are unable to make a full payment, you may request an alternate plan for the IRS to consider. 

To do that, you will need to submit an alternate scenario for the IRS with Part II of Form 14457 detailing your proposed payment arrangement. An examiner will coordinate the steps to determining your ability to pay, but the burden is on the taxpayer to prove their financial ability. If you’re able to establish an inability to make full payment, a different pay schedule may be accepted. 

It should be noted that an Offer in Compromise (OIC) (where you settle taxes for less than owed) will not be considered in a VDP case. However, there may be circumstances for which the IRS will consider a reduced penalty. Consulting a tax attorney is recommended to see if your circumstances may allow for reducing any penalties assessed by the IRS.

Why Work with a Tax Professional?

Submitting Form 14457 is complex and the time it takes is lengthy, varying depending on your particular circumstance. The burden on the taxpayer has been estimated by the IRS as follows:

• Recordkeeping 6 hrs.
• Learning about the law or form 3 hrs.
• Preparing the form 50 hrs.
• Sending the form to the IRS 15 mins.

Of course, this may not be the actual time that it will take you to go through the steps and gather all of the information that is requested. As it is called out in the application process, giving the IRS all pertinent information is due at one time and cannot be supplemented after the form is submitted. It is imperative that you have all your ducks in a row by the time you submit.

Having a tax professional on your side may be the key to avoiding a catastrophic mistake that could land you with costly penalties or even prison time. Tax professionals understand the tax code and can give you peace of mind that nothing is missed during the VDP application process. The IRS recommends consulting with a tax attorney before taking advantage of this program to ensure it’s the best option for your situation. 

It is paramount that timeliness, accuracy, and compliance with the IRS agents happen at every step to avoid complications. Having a tax professional dedicated to ensuring the best possible outcome for you is one way to ensure that you are as fully protected as possible. Taxpayers navigating the VDP are strongly encouraged to consult experienced tax attorneys or professionals to ensure full compliance with program requirements and maximize the benefits of participation.

Examples of Taxpayers Who Might Use the Voluntary Disclosure Practice

For your safety, you should consult with a tax professional, but in general, if you willfully failed to report any of the following, you may want to consider a Voluntary Disclosure.

• Unreported cryptocurrency transactions.
• Business owners who failed to report cash income.
• Individuals who failed to report inherited assets from overseas.
• Taxpayers with prior false tax returns or intentional tax evasion.
• Gambling winnings or unreported real estate transactions.

What If You Have Unreported Income or Tax Liabilities in Washington?

Washington State also offers a voluntary disclosure program. In Washington, this program is primarily geared toward business taxpayers who have unfiled sales tax or business occupation taxes. In some cases, you need to make a disclosure to both the IRS and the state. 

Still Considering Using the VDP?

The IRS Voluntary Disclosure Program (VDP) can be a lifeline for taxpayers who engage in willful noncompliance by providing a structured pathway to come clean with the IRS, avoid criminal prosecution, and resolve their tax liabilities. For those who knowingly evaded taxes—whether by underreporting income, hiding offshore assets, or committing other willful violations—the VDP allows them to disclose their wrongdoing before the IRS uncovers it. 

While participants remain liable for back taxes, interest, and civil penalties, the program significantly reduces the risk of severe consequences, such as prison time and harsher financial penalties. This program gives you a chance to rectify past mistakes and regain financial peace of mind. Hiring a tax professional early can ensure the best possible outcome.

If you’re considering making a voluntary disclosure, contact our Seattle tax attorneys today for a consultation to protect your rights and resolve your tax issues. We can provide the guidance you need to get through this difficult time.