The IRS is considering a potential overhaul of its Voluntary Disclosure Practice (VDP). This comes after the IRS formally ended the Offshore Voluntary Disclosure Program (OVDP) in 2018. Since then, taxpayers with willful offshore reporting failures must use the IRS Criminal Investigation (CI) VDP, which lacks much of the structure and certainty afforded under the former OVDP. In light of these issues, on December 22, 2025, the IRS announced plans to significantly revise the VDP in order to improve predictability and consistency in the administration of the program and to encourage more voluntary compliance.
The announcement signals more than a routine procedural update — it suggests a meaningful recalibration of how the IRS intends to administer the VDP. Generally, the VDP aims to provide taxpayers an avenue to become compliant while avoiding criminal prosecution in exchange for full disclosure of offshore accounts, assets and income and paying all tax that is due. Participation in the program has steadily declined, driven largely by uncertainty around eligibility, the multi-layered preclearance process and unpredictability surrounding potential penalties. The proposed revisions indicate that the IRS is looking to simplify those obstacles and move toward a clearer, criterion-based method of self-correction.
Historically, the OVDP was a multistep process that was both time-consuming and rife with uncertainty for taxpayers. The IRS’s proposed single submission format for Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, followed by a conditional approval letter, reflects a shift toward a more structured and efficient model. Combined with a more favorable penalty regime, and a defined three month timeline for taxpayers to finalize filings and payments, the changes could meaningfully alter how individuals and entities assess their exposure, particularly in cases involving foreign holdings, unreported income streams or past filing deficiencies.
Key Drivers Behind the Proposed Changes to VDP
Several broader operational challenges appear to have motivated the IRS’s reconsideration of the VDP framework:
- Low program participation, which limits the agency’s ability to encourage voluntary compliance.
- Staffing shortages in examination and enforcement divisions, which make sustained investigation of willful noncompliance increasingly difficult.
- The widening tax gap, which underscores the need for compliance mechanisms that function effectively without heavy administrative oversight.
A more accessible and predictable VDP could help the IRS generate revenue efficiently while reducing strain on its enforcement operations.
Simplified Entry and Application Process
Under the current program, taxpayers navigate a two-stage submission that begins with preclearance through IRS CI, which is required before a full disclosure. The taxpayer then must agree to fully cooperate with the IRS and, if preclearance is granted, cannot thereafter opt out of the program. This preliminary action alone can expose a taxpayer to risk, particularly if preclearance is denied after self-incriminating details have already been provided.
While preclearance is still required under the updated VDP, the IRS’s proposed revisions consolidate the entry process into a single electronic submission of Form 14457. Taxpayers must identify all years of noncompliance and provide a complete narrative of willful conduct. Taxpayers whose reporting failures occurred as a result of non-willful conduct, and who are otherwise eligible, are encouraged to continue using the IRS’s Streamlined Offshore disclosure procedures. If approved, CI will issue a conditional approval letter, triggering a three-month window in which the taxpayer must:
- File any amended or delinquent income tax returns, international information returns (Forms 5471, 8865, 8938) and FBARs.
- Pay all tax, penalties and interest.
- Execute applicable agreements, including closing agreements, statute of limitations waivers and FBAR specific certifications.
This model places greater emphasis on clearly defined ineligibility criteria (e.g., ongoing audits or investigations) rather than speculative assessments about whether the IRS was already aware of the taxpayer’s conduct.
Standardized and Predictable Penalty Framework
Under the current VDP guidelines, the typical penalty consists of a 75% fraud penalty on the highest year’s unpaid tax balance during any one of the required six years of returns, plus a one-time FBAR penalty of 50% of the highest aggregate balance of undisclosed accounts during the six-year disclosure period. The IRS appears poised to replace the sometimes-severe penalty landscape with a more transparent, year-by-year structure. For the most recent six years:
- Delinquent returns: Failure to file penalties would apply annually, while failure to pay penalties would be excluded.
- Amended returns: A standard 20% accuracy-related penalty would apply per year.
- FBARs: Per year penalties, inflation-adjusted.
- International information returns: For delinquent or amended international information returns, penalties of up to $10,000 per return, per year. It is unclear whether the $10,000 penalty applies to each informational return within an income tax return, or if it simply applies once to each income tax return in the disclosure period, regardless of how many international information returns the income tax return contains.
This approach more closely aligns with typical civil penalty frameworks and enables taxpayers to make more informed assessments of potential liabilities. The IRS has also indicated that not all accepted disclosures will undergo a full civil examination, another sign of the agency moving toward a more targeted use of resources.
Enhanced VDP Processing Efficiency and Timeline
The IRS’s proposed operational model represents a notable departure from the long-standing challenges associated with VDP processing. Under the current system, taxpayers often wait extended periods — sometimes a year or more — for their cases to be assigned to an examiner, accruing interest while having little visibility into next steps.
By restructuring the process around a taxpayer led, three month compliance window, the proposed framework significantly reduces this uncertainty. Taxpayers, rather than the IRS, would drive the pace of resolution by preparing amended filings, executing required agreements and remitting payments promptly after conditional approval. This structure shortens the overall duration of the process and limits interest accrual, while enabling the IRS to focus its limited resources on higher-risk areas.
The IRS also suggests moving away from mandatory, full scope audits for all disclosures. Instead, the agency may utilize targeted review protocols, reserving more comprehensive examinations for cases that present specific concerns. This refinement supports both administrative efficiency and more timely closure for taxpayers.
Practical Implications of VDP Reform
For U.S. persons with potential criminal exposure related to international income and asset reporting, the proposed revisions could meaningfully reshape how taxpayers evaluate whether to pursue a voluntary disclosure. By streamlining entry, clarifying penalties and accelerating the processing timeline, the IRS is signaling that the VDP may become a more predictable and accessible compliance pathway for those confronting historical willful reporting issues.
From a planning perspective, clients should consider how the shift toward a front loaded, taxpayer driven timeline affects their readiness. The anticipated three month compliance window following conditional approval will require taxpayers to have returns, supporting schedules and source documentation substantially prepared in advance. This places a premium on early diagnostics, record reconstruction and modeling of tax and penalty exposure before any submission is made.
The more standardized penalty structure also allows for clearer cost projections, which may encourage clients who previously hesitated due to uncertainty.
While there is precedent for the IRS offering transitional relief when it substantially revises a compliance program – such as the limited opportunity in 2014 for certain OVDI participants to move into the Streamlined Filing Compliance Procedures – those instances have been the exception rather than the rule. Taxpayers should not assume that similar flexibility will be available here. Given the increasing transparency of foreign financial reporting and expanding enforcement capabilities, waiting for the finalized terms of the new VDP may carry risk. Clients considering disclosure should evaluate their facts now so they can act strategically, whether the current program, the proposed framework or a transition window ultimately offers the most favorable outcome.
Outlook and Next Steps
Upon release of the announcement, the IRS provided for a 90-day public comment period on the terms of the proposed changes to the VDP. As comments are received and considered by the IRS, the specifics of the new program may change materially. Tax professionals are advised to monitor future IRS announcements closely as they may materially alter the summary provided in the December 22, 2025 announcement. While the IRS’s announcement outlines key directional changes, many details remain to be finalized. Still, the agency’s intent is clear: to reshape the VDP into a more accessible, efficient mechanism that encourages voluntary compliance while maintaining accountability for willful conduct.
This alert is for informational purposes only and is based on the December 22, 2025 announcement and related commentary. If you have concerns about prior reporting obligations or how the proposed changes may apply to your tax posture, we are available to assist with tailored guidance and compliance planning.
Author: Connor Southwell, JD, LLM, Partner | [email protected] and Brett Mikulec, CPA | [email protected]
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