The IRS Voluntary Disclosure Practice (VDP) is a compliance procedure designed to bring certain criminally willful taxpayers into compliance while mitigating criminal tax risk, penalties, and the examination lookback period.
That risk mitigation for the Voluntary Disclosure Practice comes at a specific civil monetary cost: generally, six years of amended tax returns, or original returns if unfiled; a one-time 75% civil fraud penalty on the year with the highest additional tax due; and, for offshore cases involving FBAR or other foreign information-reporting and income-tax noncompliance, an additional 50% penalty on the highest aggregate foreign account balance during the same period.
The formal procedure follows this order:
- a preclearance request,
- followed by an application for preliminary acceptance,
- an IRS examination and interview,
- and is concluded with a closing agreement.
Note: The VDP exists for taxpayers whose conduct carries criminal tax risk.
If a taxpayer knew of a tax or information-reporting obligation and intentionally or recklessly chose not to comply, whether by filing an incorrect return or failing to file altogether, the VDP may be the appropriate path toward compliance.
The process is lengthy and carries significant financial consequences, but taxpayers with criminal tax exposure may view that cost as a reasonable exchange for reducing the risk of prosecution. Understanding when the VDP applies, when it does not, and what it costs is the first step in deciding whether to pursue it. If you are uncertain whether your conduct rises to the level addressed by the VDP, consult a qualified tax attorney about your specific facts.
Who the Voluntary Disclosure Practice is designed for?
The Voluntary Disclosure Practice is generally intended for taxpayers whose noncompliance may have been willful and who want to come forward before the IRS discovers the issue. It is not intended for taxpayers whose noncompliance was non-willful or unintentional, as they may have less burdensome options for returning to compliance.
“The Voluntary Disclosure Practice is really designed for people with criminal tax exposure. We first evaluate the facts to determine whether the conduct rises to the level of criminal exposure. If someone has criminal culpability, we will discuss eligibility and the terms of the Voluntary Disclosure Practice.”
— Eli Noff, Hughes Noff Tax Law
What the Domestic Voluntary Disclosure Practice Requires to Reduce Criminal Tax Risk
Voluntary disclosure can reduce criminal tax exposure through a civil process that includes preclearance, application, and examination. For a domestic matter, the VDP scope and financial consequences are defined.
“If the non-compliance is from a domestic, non-foreign, issue, you are generally facing six years of tax returns that have to be amended (or filed for non-filers) to report all income and correct over-stated expenses, and a one-time fraud penalty of 75% against whichever of those six years has the highest tax-balance due. You will also be required to pay interest and the taxes that are due for those six years. That’s the price of admission.”
— Eli Noff, Hughes Noff Tax Law
In summary, the domestic VDP cost generally includes six years of corrected returns, or original returns for non-filers; the tax and interest owed across those years; and a single 75% civil fraud penalty applied to the year with the highest additional tax due. Although the cost can be significant, reducing criminal tax risk can make the process worthwhile, and the limited lookback period may provide other financial benefits.
The VDP’s financial consequences are material, but they should be weighed against both criminal-risk mitigation and the potential financial benefit of the default six-year lookback period.
How the VDP Lookback Period Can Limit Earlier-Year Liability
For example, suppose a taxpayer uses the VDP to report unreported income or correct overstated expenses, and the lookback period is 2019 through 2024. Although criminal tax noncompliance may have occurred before 2019, the IRS generally limits the VDP examination to the lookback period and forgoes collecting tax, penalties, and interest for the earlier years in exchange for the taxpayer’s voluntary disclosure and payment of the lookback-period liabilities.
Similar circumstances may apply to certain income-tax non-filers.
For a high-earning individual or business that failed to file returns for several years, the VDP may limit the lookback period to six years and produce significant financial savings. Criminal-risk mitigation should remain the primary goal, but the overall financial effect must be evaluated carefully because the IRS generally expects full payment through the VDP process.
For example, an otherwise eligible individual or business that did not file returns from 2015 through 2024 may qualify for a six-year lookback period. The IRS may then forgo requiring returns and payments for years before that period in exchange for a voluntary disclosure and payment of the required tax, interest, and one-time fraud penalty.
How Foreign Accounts Affect the Voluntary Disclosure Practice
When foreign-account noncompliance is involved, an additional penalty is layered onto the domestic structure. The firm’s guide to FBAR penalties and available compliance options explains the broader penalty landscape outside the VDP.
“If the voluntary disclosure has a foreign account component, there is an additional penalty to consider. To the extent there are foreign financial accounts that are FBAR reportable, the government penalizes 50% of the highest balance of the foreign accounts in the past six years. If a client has three hundred thousand dollars abroad, it could be a one hundred and fifty thousand dollar penalty.”
— Eli Noff, Hughes Noff Tax Law
For taxpayers with reportable foreign accounts, that 50% penalty is generally added to the domestic VDP liabilities, including the tax, interest, and applicable civil fraud penalty.
The 50% penalty is generally computed using the single highest aggregate balance reached by the foreign accounts during the six-year window. It is not imposed for every year, and it is not computed using only the current or year-end balance. In offshore cases, this is often the largest component of the VDP cost and another reason to model an international voluntary disclosure carefully before submitting the preclearance request.
Weighing the Voluntary Disclosure Practice Against Criminal Tax Risk
Clients generally consider or accept the significant monetary penalty because of the potential reduction in criminal risk.
“When using the Voluntary Disclosure, you are essentially trading a reduction in criminal tax exposure for a civil penalty. In certain instances, the consideration is incredibly difficult, because the historical foreign funds may not be around anymore. But when you’re trading money to mitigate a tax related felony or misdemeanor charge, most clients understand that trade-off and are willing to make it.”
— Eli Noff, Hughes Noff Tax Law
The VDP’s financial impact can be severe, especially when the assets connected to the noncompliance are no longer available. For taxpayers facing criminal exposure, however, the exchange may be acceptable once they understand it clearly. The analysis must happen before the taxpayer commits to the process, not after.
How the Voluntary Disclosure Practice Process Works
Voluntary disclosure is not a single filing. It is a multi-step process, and the sequence creates both protection and potential exposure.
“There are multiple steps. Step one is preclearance. You submit certain identifying information to the Criminal Investigation unit of the IRS in Philadelphia, where they check their systems and confirm you’re not already under investigation. Because if you are, submitting an application under Part II, which requires a narrative regarding the criminal conduct, can significantly harm your interests in a criminal prosecution.”
— Eli Noff, Hughes Noff Tax Law
Preclearance precedes the VDP application so that a taxpayer can learn whether the IRS has already identified the matter before disclosing the underlying conduct. Part I of Form 14457 is the preclearance request. After the IRS grants preclearance, the taxpayer submits Part II as the application for preliminary acceptance.
“Once the pre-clearance returns, you generally have 45 days to submit Part II, the actual VDP application outlining the conduct and providing detailed information regarding the tax non-compliance. Once the Part II submission is accepted, the taxpayer is formally in the voluntary disclosure. This is naturally a stressful time. A taxpayer is laying out all their negative facts as a precondition and before acceptance into the VDP. Once accepted, the case is assigned to an IRS examiner to complete the audit, including an interview, concluding with a closing agreement, Form 906, which IRS Counsel approves, closing those examined years from future audit absent a material misrepresentation. The IRS expects payment of tax, interest, and penalties in full to complete the VDP.”
— Eli Noff, Hughes Noff Tax Law
Successfully obtaining preclearance is not the same as preliminary acceptance into the VDP. Preliminary acceptance comes only after IRS Criminal Investigation reviews Part II of Form 14457. Because Part II requires disclosure of the unreported income or overstated deductions, amended returns, or original returns for non-filers, should be drafted early to avoid surprises. Form 14457 also requires the taxpayer to confirm that the delinquent or amended returns have been prepared and that supporting financial records are available. Taxpayers should consider a Kovel arrangement between counsel and an accounting professional when appropriate to support the legal representation and protect privileged communications.
For more detail on the July 2025 revision and its effect on Part II, see Hughes Noff Tax Law’s update to IRS Form 14457.
State Tax Implications of the Voluntary Disclosure Practice
A federal voluntary disclosure addresses federal return noncompliance, but amended federal returns can also create consequences for state returns, which are often based on federal adjusted gross income.
“Once you’ve amended the federal returns through the VDP, you have to consider the state implications. Just because the IRS limited the non-compliance look-back to six years, does not mean that the state will agree with that framework. Many states have their own voluntary disclosure practice that should be considered in conjunction with the IRS VDP. Work with a qualified professional at the state level to conform your state returns in the most beneficial manner and consistent with the federal voluntary disclosure.”
— Eli Noff, Hughes Noff Tax Law
A federal VDP closing agreement on Form 906 does not resolve state-level noncompliance. Many states have their own voluntary disclosure programs, lookback periods, benefits, and procedural rules. Addressing the state returns thoughtfully is part of resolving the matter as completely as possible.
This area has changed over time, and further revisions may still be ahead.
On December 22, 2025, the IRS issued IR-2025-124, proposing updates to the VDP, including a more streamlined process and penalty framework. The public comment period has closed, but the proposal remains under review. Hughes Noff Tax Law continues to monitor the proposal and its potential effect on clients.
Why Choosing the Wrong Offshore Disclosure Path Can Create Serious Risk
For offshore noncompliance, determining whether the Voluntary Disclosure Practice is the correct path requires a careful review of the taxpayer’s specific facts and circumstances.
“If someone was criminally willful and tried to bring themselves into compliance through a non-willful streamlined disclosure, that’s a new criminal act that can create very big problems for them.”
— Eli Noff, Hughes Noff Tax Law
A criminally willful taxpayer who certifies non-willful conduct in a streamlined submission signs a false certification under penalties of perjury and may create new criminal exposure in addition to the underlying tax violation. When comparing compliance paths, first evaluate the conduct and exposure carefully, and only then select the appropriate remediation procedure.
Timing is critical. Depending on the specific noncompliance, actions already taken by the IRS may prevent a taxpayer from making a timely voluntary disclosure and receiving the potential benefits of the VDP.
Preliminary acceptance is conditional. The taxpayer must respond fully and promptly during the civil examination, produce requested records, participate in interviews when required, resolve the covered compliance issues, and make full payment or obtain an arrangement acceptable to the IRS. If the IRS revokes preliminary acceptance for false statements or failure to cooperate, the limited disclosure period and VDP penalty framework may no longer apply, and the examination can expand beyond the years originally included. Hughes Noff Tax Law’s guide to what to expect in an IRS examination explains the broader field-examination process.
Frequently asked questions about the Voluntary Disclosure Practice
Who should use the Voluntary Disclosure Practice?
Taxpayers whose conduct was willful and creates criminal tax exposure. In the international context, the VDP is generally not designed for taxpayers who were innocently unaware of a filing obligation. Those circumstances may point toward the streamlined filing compliance procedures or another remediation option. The VDP is designed to address genuine criminal tax risk.
The VDP is not available to taxpayers with illegal-source income. Whether a source is illegal is determined under federal law. Therefore, income from an activity that is legal under state law but illegal under federal law is treated as illegal-source income for VDP purposes, including income from marijuana activity.
What is the VDP financial impact?
For a domestic matter, the cost generally includes six years of amended returns, or original returns for non-filers; the associated tax and interest; and a one-time 75% civil fraud penalty on the year with the highest additional tax due. For offshore cases, an additional penalty generally equal to 50% of the highest aggregate foreign-account balance during the six-year lookback period may apply.
What is the difference between the voluntary disclosure practice and the streamlined filing compliance procedures?
The streamlined filing compliance procedures are designed for non-willful taxpayers, a defined term, and require a certification of non-willful conduct under penalties of perjury. The VDP is designed for criminally willful taxpayers who cannot truthfully make that certification. Using the streamlined procedures when the conduct was criminally willful can create material new criminal exposure.
What are the steps for a voluntary disclosure practice submission?
The process includes preclearance with IRS Criminal Investigation, a Part II Form 14457 application describing the conduct, preliminary acceptance into the VDP, a civil examination and taxpayer interview, a Form 906 closing agreement, and payment of the tax, interest, and penalties. Preclearance alone is not acceptance into the VDP.
Do I still have state exposure after a federal voluntary disclosure?
Possibly. Amending federal returns can create state obligations, and states may have their own voluntary disclosure programs. Coordinating the state returns with the federal disclosure is part of resolving the noncompliance as completely as possible.
Speak With an IRS Voluntary Disclosure Attorney
The Voluntary Disclosure Practice is designed to reduce criminal tax exposure for eligible taxpayers. It exchanges that potential reduction for a defined civil cost: tax and interest due for the disclosure period, a 75% fraud penalty generally applied to one year, and, for offshore cases, an additional penalty generally equal to 50% of the highest aggregate foreign-account balance during the lookback period.
Before entering the VDP, a taxpayer should evaluate eligibility carefully and understand the process, benefits, costs, and obligations. At Hughes Noff Tax Law, we begin by examining each client’s facts and exposure to identify the appropriate path toward compliance. When the VDP is the proper path, we prepare clients for the process and what comes next.
We approach every client with empathy and provide the advocacy, direction, and resolution they deserve. Read our client reviews, and if you’re ready for real answers, call 410-694-7758 or contact us today.