IRS Voluntary Disclosure Program: A Path to Tax Compliance

Taxes April 08, 2025
IRS Voluntary Disclosure Program: A Path to Tax Compliance

Introduction

Taxpayers who have unreported income, offshore accounts, or undisclosed cryptocurrency transactions may face severe penalties and potential criminal prosecution if the IRS discovers the noncompliance. However, the IRS Voluntary Disclosure Program (VDP) provides an opportunity to come forward, correct past tax issues, and reduce the risk of prosecution.

Understanding the eligibility requirements, penalties, and application process is essential for taxpayers considering this option.

 

What Is the IRS Voluntary Disclosure Program?

The IRS Voluntary Disclosure Program (VDP) allows taxpayers who have willfully failed to report income, assets, or foreign accounts to disclose their tax noncompliance and settle their tax obligations.

Key Features of the VDP

  • Open to taxpayers with unreported domestic and foreign income, offshore accounts, and cryptocurrency transactions.

  • Provides a path to compliance while reducing the risk of criminal prosecution.

  • Requires full payment of back taxes, interest, and penalties.

  • Applies only if the IRS has not already initiated an audit or investigation.

 

Who Qualifies for the IRS Voluntary Disclosure Program?

Taxpayers may qualify if they:

  • Failed to file tax returns for past years.

  • Underreported foreign bank accounts, assets, or cryptocurrency holdings.

  • Previously filed inaccurate tax returns that omitted taxable income.

 

Who Does Not Qualify?

  • Taxpayers already under IRS investigation.

  • Cases where the IRS has received third-party information about noncompliance (e.g., foreign banks, cryptocurrency platforms, or whistleblower reports).

  • Cases involving income from illegal sources.

 

How to Apply for the IRS Voluntary Disclosure Program

The VDP application process involves multiple steps and requires careful attention to detail.

Step 1: Submit Form 14457

  • Part I: Requests preclearance and requires basic disclosure of unreported income and assets.

  • Part II: Provides detailed information about the noncompliance, including a written statement explaining the taxpayer’s situation.

Once Part I is accepted, taxpayers have 45 days to submit Part II (with an option to request an extension).

Step 2: IRS Audit and Amended Tax Filings

  • If approved, the IRS assigns an examiner to review the case.

  • Taxpayers must file corrected tax returns for the last six years.

  • If applicable, taxpayers must comply with FBAR (Foreign Bank Account Reporting) requirements.

Step 3: IRS Closing Letter and Penalty Agreement

  • Upon successful completion, taxpayers receive an IRS closing letter outlining any changes made and the penalties assessed.

  • Completing the VDP significantly reduces the risk of criminal prosecution.

 

Can Cryptocurrency Be Disclosed Under the VDP?

Yes, the IRS recently updated Form 14457 to allow for the disclosure of unreported cryptocurrency holdings. Taxpayers who previously failed to report crypto transactions should consider using the VDP to correct their filings.

 

What Are the Penalties for Participating in the VDP?

While the VDP provides protection from criminal prosecution, it does not eliminate financial penalties.

Taxpayers must:

  • Pay taxes and interest for the past six years.

  • Pay a civil fraud penalty of 75% on the highest tax deficiency year.

  • Pay a one-time FBAR penalty (typically 50% of the highest account balance or $100,000, whichever is greater).

Example: FBAR Penalty Calculation

If a taxpayer’s highest foreign account balance was $3 million, the penalty would be $1.5 million (50%), even if the current balance is lower.

 

Alternative Options to the VDP

While the Voluntary Disclosure Program is a strong option for some taxpayers, others may qualify for less severe alternatives:

1. Streamlined Foreign Offshore Procedure

  • Available to taxpayers who non-willfully failed to report foreign income.

  • Requires three years of amended returns (instead of six).

  • No civil fraud penalty is imposed.

2. Streamlined Domestic Offshore Procedure

  • For U.S. taxpayers who mistakenly failed to report foreign accounts.

  • Involves a 5% penalty on unreported assets.

3. Quiet Disclosure

  • Taxpayers amend past returns without applying for an official IRS program.

  • Riskier option, as the IRS may impose significant penalties for undisclosed tax issues.

 

Conclusion

The IRS Voluntary Disclosure Program provides taxpayers with a structured path to tax compliance while reducing the risk of criminal prosecution. However, it requires full disclosure and payment of penalties.

Block3 Finance offers expert guidance on navigating the VDP process, IRS penalty negotiations, and alternative tax compliance strategies to help taxpayers resolve past tax issues effectively.

 

If you have any questions or require further assistance, our team at Block3 Finance can help you.

Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.

You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.

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