If you have undisclosed foreign bank accounts, unreported offshore income, or unfiled international information returns—FBAR, Form 3520, Form 8938—you are already in the IRS’s crosshairs. The question is not whether the agency will eventually find you. The question is whether you come forward on your own terms or wait for a knock at the door.
The IRS Voluntary Disclosure Program (VDP) exists precisely for this situation. It gives taxpayers with willful offshore noncompliance a structured path to resolve their liability, avoid criminal prosecution, and restore their standing with the IRS—but only if they move before the government moves first. This article explains how VDP works, who qualifies, and how it compares to the alternative: the Streamlined Filing Compliance Procedures.
The Core Distinction: Willful vs. Non-Willful
Before choosing a disclosure path, you must honestly assess whether your noncompliance was willful or non-willful. This single determination shapes everything that follows.
- Non-willful noncompliance involves a genuine failure to understand or discover your reporting obligations—an honest mistake, reliance on poor advice, or a cultural or language barrier. Taxpayers in this category may qualify for the Streamlined Offshore Disclosure Program (SODP) or the Streamlined Domestic Offshore Procedures (SDOP), which carry significantly lower penalties and a simpler process.
- Willful noncompliance involves a deliberate decision to hide accounts, conceal income, or ignore known reporting requirements. If your noncompliance was willful—or if there is any risk the IRS could characterize it that way—VDP is the appropriate path.
Mischaracterizing willful conduct as non-willful in a Streamlined submission is a dangerous gamble. If the IRS discovers the misrepresentation, you lose the civil penalty protections of Streamlined and may face criminal exposure you could have avoided through VDP. An experienced tax attorney is essential for this assessment.
How the IRS Voluntary Disclosure Program Works
Step 1: Preclearance via Form 14457
VDP begins with a preclearance request submitted to IRS Criminal Investigation (CI) using Form 14457, Voluntary Disclosure Practice Preclearance Request and Application. Part I of this form establishes whether you are eligible to proceed.
The IRS will deny preclearance if:
- You are already under criminal investigation or civil examination
- You have received a summons, a John Doe summons, or are party to a court-ordered disclosure
- The IRS has already received information about you from a third party (whistleblower, bank data, treaty exchange)
- You have already made a “quiet disclosure” that the IRS has flagged
Timing is critical. The VDP window closes the moment you become the target of an investigation. If you receive any notice suggesting IRS scrutiny, contact legal counsel immediately—every day matters.
Step 2: Submitting the Full Voluntary Disclosure Package
Once preclearance is granted, you submit Part II of Form 14457 along with amended returns, FBARs, and all required international forms covering the six-year disclosure period. The IRS does not require you to go back further than six years under standard VDP, though this can vary based on facts and circumstances.
Required filings typically include:
- Amended U.S. income tax returns (Form 1040X) for the disclosure period
- FBARs (FinCEN Form 114) for each year foreign accounts exceeded $10,000
- Form 8938 (FATCA) if thresholds were met
- Form 3520 and/or Form 3520-A for foreign trusts or foreign gifts received
- Any other information returns omitted during the disclosure period
Step 3: Civil Resolution and Penalty Negotiation
After acceptance, your case transfers to IRS Civil Examination for resolution. This is where having experienced legal counsel pays dividends. The standard civil penalty framework under VDP includes:
- Tax, interest, and accuracy-related penalties on unreported income
- A single FBAR penalty of 50% of the highest account balance in the most egregious year—but subject to negotiation
- Mitigation of failure-to-file and failure-to-pay penalties where cooperating taxpayers demonstrate good faith
Crucially, VDP offers certainty. Once a closing agreement is signed, the IRS will not pursue criminal prosecution for the disclosed conduct. That guarantee does not exist in any other program—not Streamlined, not amended returns filed without disclosure, and certainly not doing nothing.
Why Quiet Disclosure Is Not a Strategy
Some taxpayers attempt to “fix” years of noncompliance by quietly filing amended returns and FBARs without going through a formal disclosure program. This is known as a quiet disclosure, and it is widely regarded as one of the riskiest approaches available.
A quiet disclosure does not protect you from criminal investigation. The IRS has specifically warned that it is aware of this practice and will scrutinize quiet disclosures for potential criminal referral. If the agency identifies your quiet disclosure and determines the conduct was willful, you may face the full weight of criminal statutes—with no safe harbor to fall back on.
VDP, by contrast, converts a potential criminal matter into a civil one. The trade-off is a more structured process and negotiated penalties. For anyone with willful conduct, that trade is almost always worth making.
VDP for Japanese and Chinese Account Holders
At Segal, Cohen & Landis (SCL), a significant portion of our VDP practice involves U.S. taxpayers with undisclosed accounts in Japan and China. These clients often face unique challenges:
- Language and cultural barriers: Many clients received inheritance or business proceeds into foreign accounts without fully understanding U.S. reporting obligations. While this supports a non-willfulness argument in some cases, the sophistication of the taxpayer and the size of the accounts are always considered.
- Treaty and FATCA pressure: Both Japan and China have financial intelligence sharing arrangements that increase the risk of IRS discovery over time.
- Hybrid structures: Some clients hold interests in foreign trusts, joint accounts with non-resident relatives, or accounts tied to family businesses—each adding layers of complexity to the disclosure analysis.
Our attorneys have deep experience navigating voluntary disclosure for Japanese clients and voluntary disclosure for Chinese clients, including the FBAR, Form 3520, and FATCA implications that often arise in these fact patterns.
The Attorney-Client Privilege Advantage
One often-overlooked benefit of working with a tax attorney—rather than a CPA or enrolled agent—in the VDP process is attorney-client privilege.
Communications between you and your attorney during the VDP process are protected. That means your attorney can conduct a candid internal investigation, assess the full scope of your exposure, and develop a strategy—all without creating a roadmap for IRS auditors. CPAs and enrolled agents do not have the same privilege protections in the context of tax investigations.
In a VDP context—where the facts you disclose to your advisor directly affect the strategy and the penalties—this protection is not a technicality. It is a meaningful legal shield.
FBAR and Form 3520 Amnesty Considerations
Foreign account holders often have FBAR and Form 3520 exposure running concurrently with unreported income. Both carry severe standalone penalties:
- FBAR penalties: Up to $10,000 per violation for non-willful failures; up to the greater of $100,000 or 50% of account balance per violation for willful failures. Multiple years compound quickly.
- Form 3520 penalties: 35% of the value of any foreign trust transfer or distribution, and 5% of the trust value per year for failure to report a foreign trust relationship.
The VDP framework allows for coordinated resolution of all these exposures in a single process, with negotiated penalties that reflect cooperation and good faith. Trying to resolve each form type separately—outside a structured disclosure program—risks inconsistent treatment and continued exposure on uncovered items.
Is VDP Right for You?
The VDP is a high-stakes process that requires careful preparation and strategic execution. It is not appropriate for every taxpayer with international tax issues—some situations genuinely qualify for Streamlined treatment, and others may involve facts that call for different approaches entirely.
What is almost never appropriate is inaction. The IRS receives more foreign account data every year through FATCA, treaty exchanges, and financial institution reporting. The window to come forward on favorable terms narrows every day.
SCL Tax Law’s attorneys represent clients across the United States and internationally in voluntary disclosure matters. We evaluate each client’s situation, conduct a privileged internal review, and develop a disclosure strategy designed to minimize penalties while securing the criminal prosecution protection that VDP provides.
Contact us to schedule a confidential consultation about your options under the IRS Voluntary Disclosure Program.
Have questions about this topic? Talk to an IRS attorney today.
Segal, Cohen & Landis, P.C. — Beverly Hills. Serving clients nationwide.
Samuel Landis, Esq.
LL.M. (Tax) · Selected to Super Lawyers®
Sam Landis is a Beverly Hills IRS tax attorney specializing in IRS collection defense, audit representation, and international tax compliance for foreign nationals and US expats.