Fix It Before They Find It: Voluntary Disclosure vs. IRS Investigation
Realizing you’ve made a serious tax mistake, especially if it was willful, can be terrifying. Do you stay silent and hope the IRS never finds out? Or do you take the risk of coming forward, knowing there may be consequences?
Whether it's unreported income, undisclosed offshore accounts, or falsified deductions, you may be facing a critical fork in the road: hide and hope, or come clean and cooperate.
Fortunately, the IRS offers a path for taxpayers who willfully violated tax laws but want to make things right. It's called Voluntary Disclosure Practice (VDP), and it can help you get your taxes back on track again. Understanding how voluntary disclosure differs from a criminal investigation, and when to take action, can mean the difference between civil penalties and federal prison.
Here's what to know about the differences between creating a voluntary disclosure agreement or being subject to an IRS criminal investigation, and how to protect yourself before it’s too late.
What Is the IRS Voluntary Disclosure Practice?
The IRS Voluntary Disclosure Practice is a formal process that allows taxpayers who willfully failed to comply with tax obligations to come forward, disclose their violations, and resolve them with the IRS. Historically, it's been a key enforcement tool to encourage cooperation from taxpayers engaged in significant noncompliance.
The program has changed over time, but the core principle remains the same. If you come forward before you're caught, you may avoid criminal prosecution. VDP addresses issues such as:
Unreported income from U.S. or foreign sources
Undisclosed offshore accounts or assets (FBAR violations)
Fraudulent or false tax returns
Falsified deductions or inflated expenses
Failure to file required information returns
When Is Voluntary Disclosure Appropriate?
Not every mistake warrants entering the VDP. The program is specifically designed for willful violations, which are cases where a taxpayer knew of their obligation but intentionally chose to ignore or circumvent it. It's not for issues like accidental omissions or misunderstanding of rules. Those can generally be resolved through amended returns or other IRS compliance pathways.
Examples of VDP-appropriate situations include:
You had foreign bank accounts for years, but never filed FBARs or reported the income.
You operate a cash-heavy business and intentionally underreported earnings.
You knowingly claimed false deductions to reduce your taxable income.
Timing is very important, as well, as entering into a voluntary disclosure agreement is only possible before the IRS initiates a criminal investigation. Once an investigation has started, you lose eligibility for the program and face the full force of IRS enforcement. That's why working with a tax attorney to get started in the VDP is crucial.
Benefits of Voluntary Disclosure
Choosing to voluntarily disclose, especially with experienced legal guidance, can offer significant advantages, such as avoiding criminal prosecution and reducing civil penalties. VDP participants, if accepted and compliant, typically avoid criminal charges, and while there are still financial penalties, they're usually less severe than criminal fines.
You can resolve all outstanding tax issues in one comprehensive process, and coming forward demonstrates good faith and cooperation, which can work in your favor during negotiations.
What Happens If You Wait? The Role of IRS Criminal Investigation
If you delay or ignore the problem, the IRS may find you first, and that’s when the situation becomes much more serious. The IRS Criminal Investigation (CI) division investigates tax fraud, evasion, and willful noncompliance. Criminal investigations can be triggered by many things, including whistleblower tips, suspicious activity reports (SARs), IRS data analytics, routine audit findings that are escalated to CI, and foreign bank disclosures under FATCA.
Once a criminal investigation starts, the IRS may conduct interviews, issue subpoenas, examine bank accounts, and even conduct surveillance. The legal consequences can include:
Fines and Restitution
Asset Seizure
Criminal Charges and Prosecution
Prison Time for Tax Evasion
How the Process Works: Voluntary Disclosure Step-by-Step
Preclearance Request: Submit an initial request to the IRS Criminal Investigation team to determine eligibility.
Preliminary Acceptance: If approved, you must submit a detailed disclosure of your tax violations.
Cooperation: You’ll work with IRS examiners to verify the disclosures, calculate owed taxes, and negotiate penalties.
Resolution: Finalize payment arrangements, resolve outstanding filings, and close the case, potentially avoiding prosecution.
Don’t Go It Alone: Why Legal Counsel Matters
If you’re even considering voluntary disclosure, the time to act is now. Once the IRS opens a criminal investigation, your opportunity to enter the VDP is gone. Additionally, it's important to note that making a voluntary disclosure agreement with the IRS should never be a DIY process. It involves complex legal and procedural steps, and mistakes, such as incomplete disclosures or poor timing, can backfire.
Working with a qualified tax attorney ensures your disclosure is accurate and complete and allows for a strategic presentation to the IRS. Along with that, you'll have more protection under the attorney-client privilege and a professional who can advocate for you during penalty negotiations.
At Kundra & Associates, we’ve guided individuals and businesses across the U.S. and abroad through the voluntary disclosure process, helping them come clean, limit exposure, and avoid criminal charges whenever possible. If you’ve committed a tax violation and are debating whether to act, know that voluntary disclosure may save you from significant penalties if you act in time. Once the IRS knocks, it’s too late.
Coming forward now is confidential, strategic, and, in many cases, the smartest move you can make. Don’t wait for the government to make the first move. Get in touch with us today and take the first step toward resolution.