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On December 22, 2025, the IRS announced proposed revisions to its Criminal Voluntary Disclosure Practice (VDP) and opened a 90-day public comment period, ending March 22, 2026. The IRS states that the proposed revisions are intended to “improve its processes” and “further incentivize non-compliant taxpayers to come into compliance.” While these revisions are a meaningful and welcome step forward, additional changes are necessary to make the VDP more effective, increase participation, and truly encourage noncompliant taxpayers to come forward voluntarily.
The IRS’s proposed changes are an important acknowledgment that the program needs adjustment. But the key question remains: Will these revisions be enough? I strongly encourage practitioners to submit comments. Your voice matters!
Last year, I identified the IRS’s Criminal Voluntary Disclosure Practice as one of the Most Serious Problems taxpayers are facing. Taxpayers and tax professionals are wary of using the program in its current form, and, as a result, the Criminal VDP is not working as effectively as intended. The IRS completed only 161 cases in almost six years (September 28, 2018, through August 31, 2024). These numbers underscore that the structure and penalty framework of the VDP is not effectively encouraging participation. I recommended several actions for the IRS to take to improve the VDP, including conducting a comprehensive review of the program and its penalty structure. The December 22nd announcement reflects that the IRS has begun that process.
The Criminal VDP offers taxpayers with potential criminal tax exposure a critical opportunity to self-correct their past compliance failures. To participate, taxpayers must make a timely, accurate, and complete voluntary disclosure regarding their noncompliance. They must submit (or amend) all returns and reports for the disclosure period, cooperate with the IRS to determine their tax liabilities, and pay the tax, interest, and penalties they owe. By voluntarily coming forward through the VDP, these individuals and entities pay back taxes, penalties, and interest and can avoid criminal prosecution. In return, the IRS gains revenue, closes part of the tax gap, and promotes future compliance – a win for everyone.
The IRS’s primary proposed revision involves the penalty framework. Under the current program, taxpayers must submit to a six-year disclosure period and agree to the assessment of 75% civil fraud penalty and willful Report of Foreign Bank and Financial Accounts (FBAR) penalty, if applicable, on the highest tax liability period. For international information returns (IIRs), the IRS does not automatically impose penalties for the failure to file IIRs under the current program, leaving penalties subject to examiner discretion.
The IRS proposes to keep the six-year disclosure period and revise the penalty framework as follows:
The shift from the longstanding 75% civil fraud penalty to a 20% accuracy-related penalty is a meaningful and welcome change. I have long recommended that the IRS reassess whether the civil fraud penalty was overly severe and discouraged participation. Reducing the penalty should encourage more taxpayers to come forward. However, refinement is still needed. Depending on the facts, the cumulative 20% or FBAR penalties across six years could approach or even exceed what some taxpayers might have faced under the prior structure. The IRS should ensure the revised framework truly incentivizes participation rather than recreating similar deterrents in a different form. In addition, the proposal does not clarify whether FBAR penalties imposed under the VDP will be treated as willful or non-willful. Greater transparency on this issue would enhance predictability and fairness. Similarly, the proposal appears to apply IIR penalties without reference to examiner discretion, which may reduce flexibility in appropriate cases.
Another area of concern is the full payment requirement. I previously recommended that the IRS allow taxpayers more flexible payment options, including partial payment installment agreements and offers in compromise, when they establish that they cannot pay all tax, penalties, and interest in full. While the IRS has always expected VDP participants to pay the tax, penalty, and interest in full, it acknowledged in the past that some would not have the ability to do so.
The proposed revisions make it clear that the program requires full payment:
FAQ 13: Are taxpayers eligible to participate in the proposed VDP if they cannot fully pay all tax, penalties, and interest? No. Full payment within three months of clearance is required.
This rigid full payment requirement excludes taxpayers who want to come forward and resolve their tax noncompliance but are unable to fully pay their liability within three months. A policy that shuts out those taxpayers does not lead to compliance. The IRS could incorporate safeguards – such as structured closing agreements – to ensure compliance with payment terms while still allowing flexibility. Encouraging disclosure should remain the central objective.
The proposal also does not address several longstanding concerns.
First, there is no provision for appeal rights. Currently, taxpayers in the VDP must agree to the IRS’s determination of tax, penalties, and interest. If they disagree there is no avenue to dispute the IRS’s determination. And if they do not agree or believe that the adjustments are correct, the IRS removes them from the VDP program. However, taxpayers in the VDP still have the right to pay no more than the correct amount of tax, and IRS revenue agents are not always correct.
To ensure fairness, I recommended the IRS extend appeal rights to VDP participants who disagree with positions taken by the IRS examiner.
Providing access to administrative appeals would strengthen fairness and confidence in the program. Unfortunately, the proposed revisions do not include any appeal rights for taxpayers.
Second, the proposal does not address the definition of illegal source income. I previously recommended the IRS narrow that definition, to the extent possible, to encourage greater participation. In its response to my recommendation, the IRS stated it was “in the process of making allowances for income derived or related to the sale of marijuana.” However, the proposed revisions do not include any change to the definition illegal source income.
I commend the IRS for publicly acknowledging the need for reform and proposing revisions to the VDP. The reduced penalty structure and modernization of procedures are important steps in the right direction. But if the IRS truly intends to “further incentivize non-compliant taxpayers to come into compliance,” it should go further. Greater payment flexibility, clarity regarding FBAR penalties, the availability of appeal rights, and a thoughtful reassessment of income eligibility would strengthen the program and enhance participation.
An effectively structured and fairly administered voluntary disclosure program benefits everyone: taxpayers avoid criminal prosecution, the IRS collects revenue, and overall compliance improves. The VDP can be a powerful compliance tool — but only if it is structured in a way that encourages participation.
I strongly encourage taxpayers and tax professionals review the proposed changes and submit comments to the IRS before March 22, 2026. You can submit comments via email to vdp@ci.irs.gov with the subject line “PROPOSED VDP PUBLIC COMMENT.” The IRS has taken an important first step. Now is the time to ensure the final version of the VDP truly promotes voluntary compliance and fairness. Your input matters.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget. NTA Blog posts are generally not updated after publication. Posts are accurate as of the original publication date. Portions of this blog may have been developed with the assistance of artificial intelligence. All AI-assisted content has been reviewed, verified, and approved by the National Taxpayer Advocate or TAS staff to ensure accuracy and integrity.