IRS Voluntary Disclosure Gets a Makeover: What the New Penalty Framework Means for Noncompliant Taxpayers

On December 22, 2025, the IRS announced proposed updates to its Criminal Investigation Voluntary Disclosure Practice and opened a 90-day public comment period that closed on March 22, 2026. The National Taxpayer Advocate called it a win she had been pushing for. The American Bar Association filed a 53-page comment letter with 30 substantive recommendations. And practitioners who have spent years telling clients that the VDP’s penalty math didn’t justify participation are now revisiting that advice.

To understand why this matters, you need to know how punitive the existing program has been.

The VDP has always been the principal pathway for taxpayers with potential criminal tax exposure to self-correct and avoid prosecution. The concept is straightforward: you come forward before the IRS finds you, pay back taxes with penalties and interest, and in return the IRS does not recommend criminal prosecution. The premise is mutually beneficial. Taxpayers avoid prison. The IRS collects revenue it would otherwise never see. The tax gap narrows.

But starting in 2009, when the IRS launched its Offshore Voluntary Disclosure Program following the UBS Swiss bank account scandal, the penalty structure became extraordinarily punitive. Taxpayers who came forward faced a willful FBAR penalty equal to 50 percent of the highest aggregate account balance for the year with the highest undeclared assets. On top of that, the program imposed a 75 percent civil fraud penalty on the year with the highest tax understatement. For a taxpayer with $2 million in undisclosed offshore accounts, the FBAR penalty alone could be $1 million, before calculating the civil fraud penalty on unreported income.

The combined effect was perverse. The program designed to encourage noncompliant taxpayers to come forward was so punitive that many taxpayers and their advisors concluded the risks of disclosure outweighed the benefits. As the National Taxpayer Advocate noted in her February 2026 blog post, the one-size-fits-all penalty structure “inappropriately ignores taxpayers’ individual circumstances” and the severity “made many practitioners hesitate to recommend” the program.

The proposed reforms address this head-on. The centerpiece is replacing the 75 percent civil fraud penalty with a 20 percent accuracy-related penalty for each year in the six-year disclosure period. This matters beyond the obvious cost reduction. A civil fraud determination carries collateral consequences in professional licensing, government contracting, immigration proceedings, and other contexts. Removing that stigma may be as important as reducing the dollar amount for some taxpayers.

The FBAR penalty restructuring is the area of greatest practitioner interest and greatest uncertainty. The proposed framework moves from a single willful penalty based on the highest aggregate account balance to a per-year penalty with annual inflation adjustments. The IRS’s announcement strongly implies that the per-year penalty would be at the non-willful level, currently about $16,000 per year with inflation adjustments. Acting Chief Tax Compliance Officer Jarod Koopman stated publicly in January 2026 that this was the intended approach. But when pressed for formal confirmation, the IRS acknowledged that fundamental questions about FBAR penalty levels remain unresolved.

This ambiguity is the single most important open issue in the proposed framework. If the non-willful rate is confirmed, the maximum FBAR penalty exposure across six disclosure years would be roughly $60,000 to $100,000 depending on inflation adjustments, a dramatic reduction from a potential seven-figure willful penalty. If the IRS instead applies willful FBAR penalties on a per-year basis, the cumulative exposure could equal or exceed the prior structure in a different form. As the ABA’s comment letter urged, the IRS should formally confirm the non-willful rate and cap FBAR penalties to three years rather than six.

Other key features of the proposed framework include failure-to-file penalties on delinquent returns, penalties of up to $10,000 per return per year for delinquent international information returns such as Forms 5471, 3520, and 8938, and a full payment requirement within three months of conditional approval.

The three-month full payment requirement has drawn the sharpest criticism from the ABA and other commentators. Under the proposal as written, a taxpayer who cannot pay in full within three months is simply ineligible for the VDP. There is no provision for installment agreements or offers in compromise within the VDP framework. The ABA’s comment letter argued this creates an access barrier that disproportionately affects lower-income taxpayers with legitimate criminal exposure who need the program most. That said, if the final framework confirms the reduced penalty profile, the total payment burden should be substantially more manageable than under the prior regime.

A separate but related development: the IRS agreed to remove the “willfulness checkbox” from Form 14457. Under the prior program, taxpayers were required to affirmatively admit, under penalty of perjury, that their noncompliance was willful. The legal implications of that admission were significant, especially if the IRS later denied participation or revoked acceptance. Removing the checkbox reduces one of the barriers that chilled participation.

For taxpayers considering their options, the critical distinction remains between the VDP and the Streamlined Filing Compliance Procedures. The VDP is for willful noncompliance, situations where the taxpayer knew they had an obligation and deliberately failed to comply. The Streamlined procedures are for non-willful noncompliance, where the failure was due to negligence, inadvertence, or mistake. For taxpayers who can truthfully certify non-willful conduct, the Streamlined procedures remain the better path: no penalties for qualifying U.S. residents abroad, and a single 5 percent miscellaneous offshore penalty for domestic filers.

If your noncompliance was willful, the proposed VDP reforms may create a window of opportunity that hasn’t existed since before 2009. But timing matters. The final guidance is expected to take effect six months after publication, and the IRS could finalize the rules at any time. Taxpayers who wait are gambling that the terms won’t change and that the IRS won’t identify them first through FATCA reporting, treaty-based information exchange, or other enforcement tools.

The most prudent approach is to consult experienced tax counsel now, assess specific exposure under both the current and proposed frameworks, and develop a strategy that accounts for the range of possible outcomes.