The Internal Revenue Service recently issued a proposal seeking public comments on changes to its Voluntary Disclosure Practice. It is specifically for those who may not have complied with tax regulations in the past but now wish to rectify the situation.
The IRS hopes that through this initiative, they can make the tax system more transparent, simpler, and more reliable. The new rules will make it absolutely clear how much penalty will be imposed for not paying taxes or providing incorrect information. Basically, this will give taxpayers more clarity and help them choose the right course of action.
Currently, the public has 90 days to provide feedback on these proposed regulations. If these regulations are finalized, it will give tax evaders a better opportunity to comply with the law and will also help the IRS collect taxes more effectively. By reading this article completely, you can get all the details regarding this matter.
What is the Voluntary Disclosure Practice (VDP)?
You can think of the Voluntary Disclosure Practice as a program under which taxpayers voluntarily come forward and admit that they previously violated tax laws and want to correct these issues. Individuals who do this are not subject to legal action by the Internal Revenue Service.
Basically, this practice involves concealing income, failing to pay taxes, and not disclosing information about foreign bank accounts. If a person fulfills all the conditions, it is beneficial for them because they then avoid having to go through the legal process, which could potentially lead to a jail sentence.
Why did the IRS introduce this proposal?
The Internal Revenue Service believes that many taxpayers are unable to correct past errors due to the complexity of the tax code or simply due to confusion. It’s true that the old rules were very complicated, and there was a great deal of uncertainty regarding penalties.
However, the IRS wants to simplify things with the new proposal. It is hoped that this step will encourage people to return to the tax system voluntarily, that the penalty rules will become completely clear and uniform, and that there will also be an increase in tax compliance.
The IRS is seeking public comments on this proposal, with a deadline of March 22, 2026. Comments can be submitted via email to [email protected] with the subject line “PROPOSED VDP PUBLIC COMMENT.” If the IRS likes the suggestion, they will make it a rule, and the rule will come into effect six months after the official notification is issued.
What is a Disclosure Period?
The disclosure period refers to the time frame for which tax returns need to be corrected. According to the new proposal, tax returns from the previous six years will be included, and this rule applies to both delinquent and amended returns.
Basically, this requires sharing accurate information for all previous tax years. If incomplete or completely false information is provided, the VDP will not be applicable, which means you will have to go through the legal process.
What will taxpayers have to do?
If a taxpayer participates in the VDP and receives conditional approval, he or she must file all pending or amended tax returns, complete forms related to foreign income or bank accounts, pay all taxes, interest, and penalties, and sign the legal agreements within due time.
Typically, a maximum of three months of time is given for this. If the task is not completed within the given time frame, the Internal Revenue Service revokes the permission given after participating in the voluntary disclosure practice.
What will the new penalty rules be?
The Internal Revenue Service is proposing to make the penalty rules more consistent and easier to understand. We have listed the details below; please read them to understand the proposed changes.
- Delinquent returns: You will only need to pay the failure-to-file penalty for each tax year; there is no need to pay the failure-to-pay penalty.
- Amended return: A 20% accuracy-related penalty is proposed for each tax year.
- FBAR (Foreign Bank Account): A separate penalty will be applied for each year, which depends on inflation.
- International Information Returns: A penalty of up to $10,000 may be imposed for each tax year.
What will the application process be like?
Under the VDP, applications will be submitted entirely online. Taxpayers will need to electronically submit Form 14457, in which they must provide a complete and truthful account of all errors made over the years and state whether the failure to pay taxes was intentional.
First, the IRS will provide pre-clearance, followed by conditional approval, which will have a maximum duration of three months.
Disclaimer: Information about the IRS voluntary disclosure proposal is for general awareness only. Official rules and eligibility are determined by the IRS.
