A request for public comment reveals the IRS is considering updates to the Voluntary Disclosure practice.  The agency states its “commitment to improve its processes, and to further incentivize non-compliant taxpayers to come into compliance.”

Key Takeaways Now That the IRS is Considering Updates to the Voluntary Disclosure Practice:

• The IRS has asked for public comments on a proposed update to its Voluntary Disclosure practices.  The public has 90 days to comment, beginning December 22, 2025.
• Taxpayers would still need to be conditionally approved by the agency to participate. They would be required to complete several important steps within the three months after conditional approval to participate in the disclosure program.
• Penalties under the new proposal are still substantial, and payment of all taxes and penalties must be made in full within three months of the agency’s conditional approval of their Voluntary Disclosure application.

New Voluntary Disclosure Compliance Requirements

Taxpayers must be conditionally approved by the agency to participate. They would be required to complete several important steps within the three months after conditional approval to participate in the disclosure program. Penalties under the new proposal are still substantial, and payment of all taxes and penalties must be made in full within three months of the agency’s conditional approval of their Voluntary Disclosure application.

The proposed changes in the updated Voluntary Disclosure procedures include a “penalty structure” that is “intended to be clear, predictable, and consistent across all disclosures.”  For delinquent return(s), failure-to-file penalties will apply to each year of returns in the disclosure period; however, failure-to-pay penalties will not be applied.

If the return is amended under the new Voluntary Disclosure compliance requirements, a 20% ‘accuracy-related penalty’ will be applied to each associated year within the disclosure.  FBAR penalties will still apply to delinquent or amended FBARs, and returns with international income will incur a penalty of up to $10,000 per year per return.

The IRS is considering updates to the Voluntary Disclosure practice to ensure the taxpayer will also provide a signed ‘closing agreement waiving statutes of limitations,’ agree to pay ‘accuracy-related penalties,’ and sign a related FBAR agreement if it applies to the taxpayer’s unique circumstances.

If the IRS is considering updates to the Voluntary Disclosure practice, what will happen to the existing penalty structure?

Existing IRS Voluntary Disclosure Program Guidelines

Under existing guidelines, the taxpayer must make a voluntary disclosure before the IRS opens any investigation or audit.  IRS CI (Criminal Investigations) must ‘preclear’ the taxpayer before filing for a Voluntary Disclosure.  The taxpayer agrees to ‘act in good faith’ and ‘fully cooperate’ with the IRS, and, once accepted, cannot request to withdraw or opt out of the program.

The existing civil fraud penalty or fraudulent failure to file will be applied to the year within the disclosure period representing the ‘highest understatement’ of reported income, and a fraud penalty of 75% of the understatement is to be paid.  Estimated tax payment penalties and applicable interest must be paid for each year within the disclosure.

International information and situations involving noncompliance with FBAR reporting requirements result in a willful FBAR penalty, usually the greater of $163,353 or 50% of the highest aggregate account balance, and complete disclosures and updated IFS forms(3520 and 3520-A, 5472, 5471).  Non-willful cases have an existing penalty cap of $16,536 per FBAR (annually).  Criminal penalties may also apply.

We shall see what becomes of the proposed changes to the IRS Voluntary Disclosure practices.  However, if you are concerned about any IRS or state tax return that may be in error, omitting income (especially offshore income), failure to accurately file appropriate FBARs, or any willful failure to file accurate returns and pay associated taxes, you need the advice and counsel of experienced international tax attorney Janathan L. Allen.

We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.