What a Voluntary Disclosure Costs: The Penalty Framework

People considering a voluntary disclosure always ask the same thing: what is this going to cost me? The answer is not zero. The Voluntary Disclosure Practice trades a possible criminal case for a civil resolution that includes the tax, interest, and a defined set of penalties.

This guide describes the civil penalty framework in IRM 4.63.3.18 (revised April 21, 2025), which applies to voluntary disclosures received after September 28, 2018, and the changes the IRS proposed on December 22, 2025. As of the IRS VDP page dated July 20, 2026, the IRS described those changes as a proposal. It is general information. The real numbers depend on your returns, and the analysis should be done with counsel before you apply.

The disclosure period: generally six years

Under IRM 4.63.3.18.3, a VDP civil examination generally covers "the most recent six tax years for which the due date has already passed." The period is measured from the date CI receives Part II of Form 14457, so it can shift if a return's due date passes while you are preparing.

There are three exceptions:

1. If you do not cooperate, the examiner may examine all noncompliant years.
2. If the noncompliance involves fewer than the most recent six years, the disclosure must still correct every period within the disclosure period.
3. With IRS consent, cooperative taxpayers may expand the period, for example to address issues with other governments or before a sale of a business.

The centerpiece: one fraud penalty

The current framework centers on a single civil fraud penalty. IRM 4.63.3.18.2 says "a civil fraud penalty or fraudulent failure to file penalty, under IRC 6663 or IRC 6651(f), respectively, will apply to at least one year of every voluntary disclosure." The penalty is asserted in "the tax year with the highest tax deficiency."

That single penalty is "in lieu of IRC 6662 accuracy-related penalties and IRC 6651(a)(1) and IRC 6651(a)(2) delinquency penalties" for the other years. The manual's examples:

• Six years of amended returns: one fraud penalty on the year with the highest deficiency and no accuracy-related penalties for the other five.
• Six years of delinquent returns: one fraudulent failure to file penalty on the highest year and no delinquency penalties on the other five.
• A mix of three delinquent and three amended years: a single penalty, either fraud or fraudulent failure to file, on the highest year.

For reference, the civil fraud penalty under IRC 6663 is 75 percent of the underpayment attributable to fraud, and the fraudulent failure to file penalty under IRC 6651(f) applies the failure-to-file addition at 15 percent per month with a 75 percent cap. See the civil fraud penalty.

The single-penalty treatment "assumes that all terms of VDP have been complied with, including, but not limited to, full cooperation."

Entities and separate tax modules

If the disclosure involves a related taxable entity, most commonly a C corporation, or another tax module such as employment taxes, the manual says a single civil fraud or fraudulent failure to file penalty applies to each entity, individual, and separate tax module. Its example: a sole shareholder whose corporation deducted the shareholder's personal expenses would face one fraud penalty at the individual level and one at the corporate level, each on the highest year. The framework is not available to related entities that do not themselves make a voluntary disclosure.

Other penalties

• Estimated tax. The penalty under IRC 6654 applies to all years of the disclosure, which the manual describes as "a computational proxy for interest."
• FBARs. "For VDP cases involving FBAR non-compliance, FBAR violation(s) are treated as willful, and penalties apply accordingly," computed under the IRS FBAR penalty guidelines in IRM 4.26.16 and 4.26.17.
• International information returns. Penalties for failing to file information returns "will not be automatically imposed." The examiner exercises discretion based on the facts and the other penalties applied.

Deviation is rare

IRM 4.63.3.18.2.1 allows a penalty deviation only "in rare and extraordinary cases." The taxpayer must present "clear and convincing evidence to the satisfaction of the IRS." The manual says the IRS "will not consider deviating from the standard penalty structure due to a fraud penalty's negative impact on social status, political aspirations, or professional licensure." A deviation would consider applying accuracy-related or delinquency penalties to all years instead of the single fraud penalty, and non-willful FBAR penalties instead of willful ones. Only VDP counsel can approve a deviation.

Revocation resets everything

If preliminary acceptance is revoked, IRM 4.63.3.18.1 says examiners may expand the examination to all tax years and "assert all potentially applicable civil penalties, including FBAR, to the maximum extent under the law." The predictable framework is the reward for full cooperation. Without it, the framework disappears. The manual notes the taxpayer may exercise appeal rights after revocation.

Interest and statute extensions

Penalties are only part of the bill. The VDP requirements in IRM 4.63.3.18.1 call for payment of the tax, interest, and penalties, and interest runs on the tax for every year in the disclosure period.

Cooperation also includes giving the IRS time. The same section lists "providing statute extensions or waivers as necessary" as an element of cooperation, and IRM 4.63.3.18.7 tells examiners to solicit Form 872 consents for years with less than one year left on the assessment statute. When a year in the disclosure period is already barred, the manual says a Form 906 closing agreement is required for all years of the disclosure period.

Payment

The current practice requires full payment or a full-payment arrangement acceptable to the IRS. IRM 4.63.3.18.1 lists payment in full of all Title 26 taxes, additions, interest, and penalties, and Title 31 penalties, or "entering into a full payment arrangement acceptable to the IRS," as an element of cooperation. The manual addresses requests for other than full payment separately in IRM 4.63.3.18.11.

The December 22, 2025 proposal

The IRS proposed a different structure, with comments due March 22, 2026. According to the IRS news release and VDP FAQs, under the proposal:

• Delinquent returns: failure-to-file penalties apply for each year in the disclosure period; failure-to-pay penalties do not.
• Amended returns: a 20 percent accuracy-related penalty applies for each year in the disclosure period.
• FBARs: penalties apply per year and are subject to annual inflation adjustments.
• International information returns: penalties of up to $10,000 per return, per year.
• Disclosure period: generally the most recent six years.
• Timing and payment: within three months after conditional approval, taxpayers must file all required returns and reports, pay all taxes, penalties, and interest in full, and sign required agreements, including a closing agreement waiving statutes of limitations.

The proposal would replace the single fraud penalty with per-year standardized penalties. The IRS FAQs say full payment within three months of clearance would be required, and that "no penalty deviations will be permitted." The IRS said that if finalized, the revised procedures are expected to take effect six months after publication of the final terms.

Which framework will apply to you

The IRS said the proposed updates "do not create any rights or expectations" for taxpayers who applied before the proposal is finalized, and that eligibility under any revised VDP will be determined under the procedures in effect when the changes are finalized. Its FAQs describe limited circumstances in which a taxpayer whose application has not progressed far may express interest in switching once the proposal is final. That choice, and the comparison of costs under each framework, is a central part of any disclosure analysis. See the Voluntary Disclosure Practice and Form 14457 step by step.

Penalties are approved, not just computed. IRM 4.63.3.18.2 notes that managerial penalty approval is subject to IRC 6751(b)(1), and that an examiner's FBAR position must be approved by an FBAR coordinator, the group manager, and designated VDP FBAR counsel before it is discussed with the taxpayer.

General information only, not legal advice. Reading this page does not create an attorney-client relationship. Laws and IRS procedures change; the sources cited were reviewed on the date shown above.