IRS Voluntary Disclosure Program – How to Come Forward Before It’s Too Late

IRS Voluntary Disclosure Program – How to Come Forward Before It’s Too Late

Here’s the brutal truth about the IRS Voluntary Disclosure Practice: it only works when you don’t need it yet. The moment you’re in actual trouble – the moment the IRS has started looking at you – it’s too late. The program exists for people who haven’t been caught. And the cruelest part is that you’ll never know whether the IRS has already received information about you from a third party. Your “voluntary” disclosure might already be too late, and you won’t find out until after you’ve confessed to federal crimes.

Welcome to Spodek Law Group. Our goal is to explain exactly how the IRS Voluntary Disclosure Practice works, who it’s actually for, and what it will cost you – because coming forward isn’t free. You’ll avoid prison, but you’ll pay dearly in penalties. Todd Spodek has helped clients navigate this process successfully, and he’s also had to explain to clients why they waited too long and the door had already closed. Understanding the timing is everything.

If you’re considering voluntary disclosure, call us at 212-300-5196 before you do anything. One wrong step can destroy the very protection you’re seeking.

What the Voluntary Disclosure Practice Actually Is

The Voluntary Disclosure Practice is a long-standing program run by IRS Criminal Investigation. It allows taxpayers who have willfully failed to comply with tax obligations to come forward and potentially avoid criminal prosecution.

Notice the word “potentially.” Thats important.

Completing voluntary disclosure does NOT guarantee immunity from prosecution. The IRS explicitly states that a voluntary disclosure “may result in prosecution not being recommended.” May. Not will. You can do everything right – submit the forms, pay the penalties, cooperate completely – and the IRS can still decide to prosecute you. Its rare, but its possible.

What you get from voluntary disclosure is consideration. The IRS agrees to consider your voluntary disclosure along with all other factors when deciding whether to recommend criminal prosecution. Its a factor in your favor, not a get-out-of-jail-free card.

Heres the paradox that should terrify you: to use this program, you must admit in writing that you committed willful tax crimes. The form requires you to provide a detailed narrative explaining your noncompliance “from inception to the present.” You’re literaly writing a confession. If the IRS decides to prosecute you anyway, youve handed them the evidence they need.

At Spodek Law Group, we take this seriously. Voluntary disclosure is not something you do casually. Its a calculated decision that requires understanding both the benefits and the risks. Before any client files a voluntary disclosure, we make sure they understand exactly what theyre agreeing to – and what could go wrong. This is not a form you fill out on your own. This is federal criminal law.

The Only Time It Works – Before They Know

The single most important requirement for voluntary disclosure is timing. The disclosure must be “timely.” And timely has a very specific legal meaning.

A voluntary disclosure is timely only if the IRS receives it BEFORE they have:

Commenced a civil examination or criminal investigation of you. If an auditor has contacted you, its too late. If Special Agents have shown up, its too late. If you’ve received any notice that the IRS is looking at your returns, its too late.

Received information from a third party alerting them to your noncompliance. This is the trap most people dont see coming. If a whistleblower reported you, its too late. If another government agency shared information about you, its too late. If a foreign government disclosed your account under a tax treaty, its too late.

Acquired information directly related to your specific liability. If the IRS has learned anything about your particular tax situation from any source, its too late.

Heres the window you cant see: you have no way of knowing whether the IRS has already received information about you. Third-party reports are confidential. Foreign bank disclosures happen without your knowledge. The IRS dosent call you to say “we just got a tip about you – last chance to come forward voluntarily.”

You might submit your voluntary disclosure believing your being proactive, only to discover that the IRS already knew about you from a whistleblower last month. Your disclosure isnt voluntary anymore – its a confession to crimes they were already investigating.

This is why timing matters more then anything else. The earlier you come forward, the more likely you are to still be within the window. The longer you wait, the more chance that window has already closed without your knowledge.

The IRS has information-sharing agreements with dozens of countries. Banks around the world are required to report American account holders under FATCA. The Panama Papers, Paradise Papers, and other leaks have exposed millions of offshore accounts. Every year, the information flowing to the IRS increases. Every year, the window for “voluntary” disclosure shrinks.

And heres something else people dont realize: the IRS dosent have to act on information immediately. They can recieve a tip about you, file it away, and wait. Months later, you submit your “voluntary” disclosure. The IRS checks there records and discovers they already knew about you. Your disclosure is rejected as untimely. You just confessed to crimes they were already aware of.

The Two-Part Process

The Voluntary Disclosure Practice uses Form 14457, which has two parts.

Part I – Preclearance Request

Part I is your request to enter the program. You submit basic identifying information, and the IRS determines wheather your eligible. They check wheather you’re already under investigation. They verify that your income isnt from illegal sources (which would disqualify you).

Preclearance is not acceptance. Its just the IRS saying “youre eligible to apply.” Many people confuse this step with being accepted into the program. Theyre wrong.

Part II – Full Application

Once you recieve preclearance, you have exactly 45 days to submit Part II. Miss that deadline and your out.

Part II is the hard part. You must provide a detailed narrative truthfully explaining your noncompliance from inception to the present. This means explaining:

• What you did
• When you started doing it
• Why you did it (the willful intent)
• Who else was involved (banks, advisors, accountants)
• What specific laws you violated
• The approximate amounts involved

Your literaly writing the prosecutions case against you. If anything goes wrong later – if the IRS revokes your acceptance or decides to prosecute anyway – they have your signed confession.

You must also have all documentation ready to submit immediately. This includes:

• Delinquent or amended tax returns for the last six years
• Full payment of tax, interest, and penalties (or a plan to pay)
• Supporting documents like bank statements and work papers
• Statute consent forms extending the time the IRS can assess taxes

This isnt something you can rush together in 45 days. You need to be working with a criminal tax attorney before you even submit Part I, so everything is ready when Part II comes due.

The Price You’ll Still Pay

Heres the irony that catches people off guard: you avoid prison, but you still lose most of the money you hid.

The penalties in voluntary disclosure are substantial:

Civil fraud penalty: 75% This is applied to the tax year with the highest liability within the six-year disclosure period. If your worst year had $100,000 in unpaid taxes, your penalty is $75,000. Just for that one year.

FBAR penalty: 50% If you had unreported foreign financial accounts, the IRS imposes a willful FBAR penalty of 50% of the highest aggregate balance during the disclosure period. If your offshore accounts held $500,000 at there peak, thats a $250,000 penalty.

Full tax and interest for six years. You owe every dollar of tax that should have been paid, plus interest that has been compounding since the original due date. Six years of interest adds up fast.

When people add up these numbers, they often realize they’re paying back almost everything they hid, plus more. The only thing they’re saving is there freedom. For most people, thats worth it. But you should understand going in that voluntary disclosure is not cheap.

At Spodek Law Group, we help clients calculate the true cost before they commit. Sometimes the numbers are manageable. Sometimes clients discover the penalties would exceed what they have. This changes the analysis significantly.

Lets look at a real example. Suppose you have an offshore account with $1 million that youve hidden for six years. The account generated $40,000 per year in interest that you didnt report. Heres what you might owe:

Back taxes on $240,000 of unreported income over six years – approximately $75,000 in federal tax alone. Interest compounding on those taxes for six years – another $15,000 to $25,000. The 75% civil fraud penalty on your worst year – approximately $9,000. The 50% FBAR penalty on your highest account balance – $500,000.

Add it up: youre looking at roughly $600,000 in total payments. On a $1 million account that generated $240,000 in income. By the time your done, you have less then half of what you started with.

The math gets worse if your account was larger. The math gets better if you had legitimate expenses or losses that offset some income. But the point is clear: voluntary disclosure is expensive. You pay to stay out of prison. The question is wheather prison would cost you even more – and the answer is almost always yes. A felony conviction, years of incarceration, and the destruction of your career makes even $600,000 in penalties look like a bargain.

The Willfulness Admission Problem

Until recently, Part II of Form 14457 required taxpayers to check a box explicitly admitting willfulness. You had to confirm that your noncompliance was voluntary, intentional, and knowing.

This created an obvious problem. Willfulness is the key element the government needs to prove for criminal prosecution. By checking that box, you were providing exactly what prosecutors would need if they decided to charge you anyway.

The Taxpayer Advocate Service raised concerns about this. They argued the willfulness checkbox had a “chilling effect” on participation in the VDP. People who might otherwise come forward were refusing becuase they didnt want to sign a written confession.

The IRS agreed. They committed to removing the willfulness checkbox from the next revision of Form 14457.

But heres the thing: the narrative requirement remains. You still have to explain your noncompliance in detail, from inception to present. Any competent prosecutor can infer willfulness from a narrative that describes years of hiding income, using offshore accounts, or deliberately failing to file. The checkbox is gone, but the confession remains.

This is why you need an attorney before you submit anything. The narrative has to be truthful – lying would create new criminal exposure. But it also has to be crafted carefully so you dont provide more evidence then necessary. This is a balance that requires legal expertise.

What Happens After You’re Accepted

Once the IRS grants preliminary acceptance of your disclosure, your case is forwarded to the civil examination division. An examiner is assigned to your case. They will audit your disclosed returns for the six-year period.

The examination can be extensive. The examiner may request additional documentation. They may require an interview. They will verify that your disclosure was accurate and complete.

If everything checks out, you recieve a closing letter. This letter details which returns have been resolved and what penalties you’ve agreed to pay. Its as close as you can get to a guarantee that you wont be prosecuted for the disclosed years.

But theres a critical requirement that continues forever: you must remain tax-compliant after the disclosure.

If you fail to file a return, fail to pay taxes, or violate any tax obligation after your disclosure, the IRS can revoke your preliminary acceptance.

Revocation means everything falls apart. The IRS can prosecute you for all years – including the ones you disclosed. Your confession in Form 14457 becomes evidence against you. All the penalties you paid dont protect you anymore.

Weve seen this happen. Someone completes voluntary disclosure successfully, pays the penalties, gets the closing letter, and thinks theyre safe. Then they get sloppy. They file late the next year. They underreport income. They think “the VDP is done, so it dosent matter.”

It matters. The IRS views post-disclosure noncompliance as evidence that you werent genuinly trying to come into compliance – you were just trying to avoid prosecution temporarily. And that can trigger revocation of everything.

This creates a lifetime obligation. Once you go through voluntary disclosure, you must be perfect forever. One late return, one underreported income item, one missed estimated payment – any of these could potentially trigger a review of your VDP status. The IRS dosent forget. Your file is flagged permanently.

At Spodek Law Group, we make sure clients understand this before they commit. Voluntary disclosure isnt just about paying penalties and moving on. Its about committing to absolute compliance for the rest of your life. If thats not something your prepared to do, you need to think carefully about wheather this is the right path.

When Voluntary Disclosure Is the Right Choice

Voluntary disclosure makes sense when you have:

Significant criminal exposure. If your conduct was clearly willful and could result in prosecution, the protection from criminal charges is valuable. For civil matters, there are often better options.

No existing IRS contact. If the IRS hasnt contacted you yet, the window might still be open. If theyve already reached out, its too late.

The ability to pay. Voluntary disclosure requires full payment or a payment plan. If you cant afford the penalties, the program may not accept you.

The will to remain compliant. If you go through VDP and then violate tax law again, youve made everything worse. Only pursue this if your committed to staying clean.

Voluntary disclosure does NOT make sense when you have:

Non-willful conduct. If your violations were honest mistakes, theres no criminal exposure to protect against. Filing amended returns is simpler and cheaper.

Already under investigation. If the IRS has contacted you, the door is closed. You need criminal defense, not voluntary disclosure.

Illegal source income. The VDP explicitly excludes income from illegal activities. This includes activities legal under state law but illegal federaly (like marijuana in many states).

There are also alternatives to VDP that might make more sense for certain situations. If your noncompliance was truly non-willful – you made honest mistakes, not deliberate evasion – you might qualify for the Streamlined Filing Compliance Procedures instead. Streamlined has lower penalties and dosent require admitting willfulness. But you can only use Streamlined if your conduct wasnt willful. Lying on a Streamlined certification creates new criminal exposure.

For clients with mixed situations – some willful conduct, some non-willful – the analysis gets complicated. This is exactly why you need an experienced tax attorney to evaluate your specific facts before choosing a path.

Spodek Law Group is located in the Woolworth Building at 233 Broadway in Manhattan. We handle voluntary disclosure cases nationwide. If you think you need to come forward to the IRS, call us at 212-300-5196 before you do anything else.

Todd Spodek has guided clients through successful voluntary disclosures – and has also had the difficult conversation with clients who waited too long. The difference between those outcomes is almost always timing. The earlier you call, the more options you have.

One thing we tell every client considering voluntary disclosure: the process is not something to attempt alone. The forms look simple, but they’re not. The narrative you write becomes a legal document that can be used against you. The timing determinations require understanding what the IRS knows and dosent know. The penalty calculations are complex and often negotiable.

People who try to do this themselves often make mistakes that cant be undone. They submit disclosures that are incomplete and get rejected. They write narratives that admit more then necessary. They miss the 45-day Part II deadline. They fail to prepare proper returns. Any of these errors can destroy the protection the program is supposed to provide.

This is federal criminal law. The stakes are your freedom. Get professional help before you submit anything.

Voluntary disclosure isnt a guarantee of anything. But for people with genuine criminal exposure who come forward before the IRS finds them, its often the best available option. The question is wheather your window is still open. Find out before its too late. Call Spodek Law Group today at 212-300-5196. The consultation is free. The mistake of waiting could cost you everything.