IRS To Cut Penalties In Overhauled Criminal Voluntary Disclosure Program

Overview: IRS Preparing Lower Penalties for the Criminal Voluntary Disclosure Program

The Internal Revenue Service is preparing to roll out a substantially revised Criminal Voluntary Disclosure Program (VDP), and the headline change is a lower penalty bill for taxpayers who come forward. An IRS official said publicly on August 25, 2026 that the redesigned program will carry reduced penalties and a shorter overall timeline, and that it is expected to launch within the next two months.

The Criminal VDP lets a taxpayer with willful, undisclosed noncompliance, unreported income, unfiled returns, hidden offshore accounts, or unreported crypto, come forward before the IRS finds the problem on its own, in exchange for a much lower risk of criminal referral.

The program has existed in its current form since 2018, but participation has been thin: the National Taxpayer Advocate reported that the IRS closed only 161 cases between September 2018 and August 2024. The redesign now underway is the IRS’s response to that low uptake, and it follows an earlier VDP overhaul announcement made in December 2025.

This matters to a broad group of taxpayers, including individuals with unreported foreign accounts or offshore assets, business owners with unfiled or inaccurate returns, holders of unreported cryptocurrency, and cross-border filers, including US citizens and green card holders living in Canada, who may not have kept up with US filing obligations.

Background: How the IRS Got Here

The Criminal Investigation Voluntary Disclosure Practice is a long-standing administrative practice, not a statutory right. It gives IRS Criminal Investigation a factor to weigh, along with everything else in a case, when deciding whether to recommend prosecution. A voluntary disclosure has never guaranteed immunity, and the IRS has been explicit that it creates no substantive or procedural right a taxpayer can enforce.

On December 22, 2025, the IRS announced proposed updates to the VDP and opened a 90-day public comment period that closed on March 22, 2026. The agency said the goal was to make its processes clearer and to further incentivize non-compliant taxpayers to come into compliance.

IRS Criminal Investigation Chief Guy Ficco had previewed the coming changes at an industry conference in late 2025, and the National Taxpayer Advocate publicly urged experienced US tax attorneys and other advisors to weigh in during the comment period, calling the proposal a meaningful and welcome step but not necessarily a complete fix.

The August 25, 2026 update moves the process from proposal to near-term reality. According to the IRS official, the redesigned program is expected to launch within roughly two months, though the agency has not yet published final terms, and the December 2025 proposal remains the best public description of what the new program will look like.

Key Issues and Findings: The New Penalty Framework and Process

The December 2025 proposal, which the IRS has since confirmed will move forward with reduced penalties, would replace the VDP’s long-standing penalty structure with a materially lighter one:

Under the current practice, a taxpayer who discloses unreported income generally faces a 75 percent civil fraud penalty, and a willful FBAR penalty of up to 50 percent of the highest account balance for each year of noncompliance. Practitioners have described that combination as prohibitively punitive for many taxpayers who might otherwise come forward.

Under the proposed framework, amended returns would instead carry a 20 percent accuracy-related penalty for each year in the disclosure period. Delinquent returns would carry a failure-to-file penalty per year, with no separate failure-to-pay penalty layered on top. FBAR penalties would be assessed per year and adjusted annually for inflation, though the IRS has not yet confirmed whether that figure will land at the non-willful FBAR rate, currently ten thousand dollars per year. Penalties for delinquent or amended international information returns, such as those covering foreign trusts, corporations, or gifts, would be capped at ten thousand dollars per return, per year.

Until a June 2024 revision to Form 14457, IRS examiners had discretion to apply a lesser accuracy-related penalty instead of the 75 percent civil fraud penalty where the facts supported it. That discretion was removed, which made the 75 percent penalty the automatic outcome regardless of individual circumstances, and which seasoned US tax attorneys have pointed to as a key reason participation dropped further. The 2025 proposal effectively restores flexibility for taxpayers, not by giving examiners discretion back, but by lowering the default penalty itself.

The dollar impact is concrete. A taxpayer with a foreign account that peaked at $300,000 during the disclosure period faces a 50 percent willful FBAR penalty of roughly $150,000 under the current rules. Under the proposed per-year, inflation-indexed structure that figure would likely fall substantially, though the IRS has not yet confirmed the applicable rate, which remains one of the most closely watched open questions among US tax attorneys who handle offshore disclosures.

Not every experienced US tax attorney is convinced the redesign solves the underlying problem. Commentary on the proposal has pointed out that the 20 percent penalty means little if the three-month, full-payment deadline is what actually keeps taxpayers away, since a lower penalty is only attractive to someone who can also fund it on a tight timeline. That critique is a fair one, and it is a reason to plan the funding side of a disclosure well before applying, not a reason to assume the changes will not help.

The disclosure period itself would generally cover the most recent six years for delinquent and amended returns, consistent with the current practice. The application mechanics are also being formalized: a taxpayer applies for preclearance electronically on Form 14457, identifying every year of noncompliance and describing the willful conduct in full. Once precleared, the taxpayer receives a conditional approval letter and then has three months to file every required return and FBAR, pay all tax, penalties, and interest in full, sign a closing agreement waiving the statute of limitations, and execute an FBAR agreement where applicable. The IRS retains the discretion to review any disclosure and can rescind a conditional approval, and full civil and criminal exposure, if the taxpayer does not meet the program’s terms.

Describing the redesign, the IRS official framed the goal in terms of mutual benefit, saying the instructions to the team were that “it’s got to be beneficial to the taxpayer — and to us.” That framing reflects the core problem the IRS is trying to solve: a program taxpayers were largely avoiding because the cost of coming forward voluntarily was not meaningfully lower than the cost of being caught.

Practical Implications for US Taxpayers

A lower penalty framework changes the math for a lot of taxpayers who have been sitting on undisclosed income or unfiled returns and weighing whether disclosure is worth it. Dropping from a 75 percent civil fraud penalty to a 20 percent accuracy-related penalty, if it survives into the final rules unchanged, is a significant reduction in exposure, and it is the kind of change that could finally move the needle on a program that has produced very few completed cases relative to the scale of US offshore and unreported-income noncompliance.

That said, the core mechanics that made the VDP demanding are not going away. Full payment of tax, penalties, and interest is still due within three months of conditional approval, so taxpayers without liquid funds available will still need to plan for an installment arrangement or another funding source before applying. The six-year lookback also means gathering and reconstructing several years of records, which takes time. Taxpayers should not wait for the final published rules before starting that preparation, because eligibility for any version of the VDP depends entirely on timing: a disclosure is only voluntary if it is made before the IRS opens a civil examination or criminal investigation, or receives information about the noncompliance from a third party, an informant, or another government agency.

The VDP is also only the right tool for willful conduct. Taxpayers whose noncompliance was not willful are generally better served, and pay far less, through the Streamlined Filing Compliance Procedures. Distinguishing willful from non-willful conduct is a fact-specific, high-stakes judgment call that should be made with an experienced US tax attorney before any disclosure is filed, since an incorrect self-assessment of willfulness can undermine the protection the program is meant to provide.

It is also worth noting that the IRS has been willing to close other offshore relief programs with little warning; the Delinquent FBAR Submission Procedures were removed earlier this year. No IRS relief program, including a redesigned VDP, is guaranteed to remain open once the political or administrative winds shift. That reinforces the case for acting during the current window rather than waiting to see how the final rules land. For taxpayers with frozen accounts or existing IRS enforcement action already underway, voluntary disclosure is generally no longer available, which is one more reason timing drives the entire analysis.

Cross-border taxpayers deserve a specific mention. US citizens and green card holders living in Canada are often surprised to learn that ordinary Canadian accounts, including RRSPs, TFSAs, and RESPs, can trigger FBAR and Form 8938 reporting obligations, and that unfiled US returns can create exactly the kind of willful or non-willful exposure these programs are built to address. A lower VDP penalty structure could make voluntary disclosure meaningfully more attractive for this group as well, once the final rules are published.

“Many of our cross-border clients don’t realize a Canadian RRSP or TFSA can create a US filing problem years before anyone at the IRS notices. A materially lower penalty is exactly the kind of change that makes voluntary disclosure worth a serious look, instead of something people keep putting off.”

— David J. Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch P.C.

Takeaway

The direction of travel is clear even before the final rules are published: penalties are coming down, and the IRS wants more taxpayers to actually use the Criminal Voluntary Disclosure Program instead of avoiding it. The structural requirements, a six-year lookback, a preclearance application, a three-month window to file and pay in full once conditionally approved, are expected to stay largely intact. Taxpayers with exposure should treat the current period as preparation time, not waiting time, because the deciding factor in every voluntary disclosure is whether the taxpayer gets there before the IRS does.

Pro Tax Tips

• Do not wait for the IRS to publish final terms before assessing your exposure. Voluntary disclosure only works if it happens before the IRS opens an examination or investigation, or learns of the noncompliance from a third party, so the value of the lower proposed penalties disappears entirely if the IRS gets there first.
• Start by having a knowledgeable US tax attorney review your filing history, under attorney-client privilege, before any information is shared with the IRS. Where the analysis involves reconstructing income or account records, consider having the attorney retain a Kovel accountant, an accountant engaged by the lawyer rather than by the taxpayer directly, so that the accountant’s work stays covered by attorney-client privilege instead of becoming discoverable the way a directly retained accountant’s file could.
• Gather six years of returns, account records, and any documentation that speaks to whether your noncompliance was willful or non-willful, since that distinction determines whether the Criminal VDP or the far less costly Streamlined Filing Compliance Procedures is the right path.
• If liquidity is a concern, raise it early: full payment is still due within three months of conditional approval under the proposed framework, and an installment plan needs to be arranged in advance rather than negotiated after the deadline has passed.
• Finally, keep watching for the IRS’s final published terms, since the December 2025 proposal, however closely the agency appears to be following it, is not yet binding, and details such as the exact FBAR penalty rate remain unconfirmed.

FAQs: IRS Criminal Voluntary Disclosure Program Changes

What is the IRS Criminal Voluntary Disclosure Program?

It is a longstanding IRS Criminal Investigation practice that lets a taxpayer with willful tax noncompliance, such as unreported income, unfiled returns, or undisclosed foreign accounts, come forward before the IRS identifies the problem independently. A timely, accurate, and complete disclosure is a factor the IRS weighs when deciding whether to recommend criminal prosecution, though it does not guarantee immunity.

What penalty changes has the IRS proposed for the VDP?

The December 2025 proposal would replace the current 75 percent civil fraud penalty with a 20 percent accuracy-related penalty per year for amended returns, apply failure-to-file penalties (without failure-to-pay penalties) to delinquent returns, cap international information return penalties at ten thousand dollars per return per year, and assess FBAR penalties per year with annual inflation adjustments.

When will the new Voluntary Disclosure Program take effect?

As of August 2026, an IRS official said the redesigned program is expected to launch within the next two months. The IRS has not yet published final rules, so the exact effective date and any last changes to the December 2025 proposal are not yet confirmed.

What happens to the FBAR penalty under the proposed program?

FBAR penalties would be assessed on a per-year basis and adjusted annually for inflation, replacing the current 50 percent willful FBAR penalty. The IRS has not yet confirmed whether the new figure will be set at the non-willful FBAR rate, currently ten thousand dollars per year.

Do I still have to pay everything in full under the new VDP?

Yes. The proposed framework keeps the existing requirement that a taxpayer pay all taxes, penalties, and interest in full within three months of receiving conditional approval, or arrange a full-pay installment agreement.

What years does a voluntary disclosure need to cover?

The disclosure period generally covers the most recent six years for delinquent and amended returns, the same lookback period used under the current practice.

How is the Criminal VDP different from the Streamlined Filing Compliance Procedures?

The Criminal VDP is for willful noncompliance and carries a criminal-exposure component along with civil penalties. The Streamlined Filing Compliance Procedures are for taxpayers whose noncompliance was non-willful, and they generally involve substantially lower penalties. Choosing the wrong program can be costly, so this determination should be made with a knowledgeable US tax attorney.

Can I still use the VDP if the IRS has already contacted me?

No. A disclosure is only voluntary if it is made before the IRS has opened a civil examination or criminal investigation, or has received information about the noncompliance from a third party, an informant, another government agency, or a criminal enforcement action such as a summons or search warrant.

What happens if I do not complete the VDP requirements after conditional approval?

The IRS can rescind the conditional approval. A taxpayer who fails to comply with the program’s terms can then be subject to a full examination and all applicable civil and criminal penalties, without the benefit of the disclosure.

Does the Voluntary Disclosure Program cover unreported cryptocurrency?

Yes. Unreported digital asset income and unfiled crypto-related returns fall within the scope of willful noncompliance the VDP is designed to address, and the same eligibility and penalty rules apply.

Should Canadians with US tax obligations pay attention to these changes?

Yes. US citizens and green card holders living in Canada, and Canadians with US-source income or accounts, can have FBAR, Form 8938, and US income tax filing obligations they were not aware of. A lower VDP penalty structure could make voluntary disclosure a more attractive option for this group once the final rules are published.

Do I need a US tax attorney to make a voluntary disclosure?

It is strongly advisable. A voluntary disclosure involves an irreversible admission of willful noncompliance, so working with an experienced US tax attorney under attorney-client privilege, before any information reaches the IRS, is the standard and recommended approach.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.