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Slug: irs-voluntary-disclosure-program-overhaul-2026
Date: February 17, 2026
Source: https://abitos.com/irs-plans-to-simplify-its-voluntary-disclosure-program-heres-what-it-means/

For years, CPAs with clients who have offshore tax problems have been working with a confusing, unpredictable system that nobody liked. The IRS is about to fix that.

On December 22, 2025, the IRS announced plans to overhaul its Voluntary Disclosure Practice (VDP) — the program that lets taxpayers come clean about unreported foreign income, hidden offshore accounts, and other international compliance failures before the government comes knocking. If you have clients sitting on undisclosed foreign assets, now is the time to pay attention.

Here's what's changing, and what you should be telling your clients.

A Little History: Why the VDP Needs a Reboot

In 2018, the IRS shut down the Offshore Voluntary Disclosure Program (OVDP). That program had clear rules, defined penalties, and a structured path to criminal immunity. Complicated? Yes. But at least taxpayers knew what they were signing up for.

When the OVDP ended, the IRS directed people with serious offshore compliance problems to the existing VDP — a program run through IRS Criminal Investigation (CI). The problem? It was messy. Slow. Unpredictable. Penalties were opaque, the process dragged on, and professionals advising clients through it were essentially navigating without a map.

The IRS apparently noticed. Fewer taxpayers have been using the current VDP, which means more people are sitting on problems instead of fixing them. The tax gap keeps growing. So the IRS is trying to make compliance easier.

What the New VDP Looks Like

The proposed overhaul strips out a lot of the complexity. Here's the redesigned process:

Step 1: One Application.
Instead of a multi-step intake process, taxpayers submit a single electronic form — Form 14457 — that includes all years of noncompliance and a full explanation of what happened.

Step 2: Conditional Approval.
If IRS Criminal Investigation approves the submission, the taxpayer receives a conditional approval letter.

Step 3: Three Months to Fix Everything.
From conditional approval, taxpayers have three months to: - File all missing or amended tax returns - File required international forms (Forms 5471, 8865, 8938) - File all FBARs (foreign bank account reports) - Pay all taxes, penalties, and interest - Sign required agreements

Clear deadline. No more open-ended limbo.

The New Penalty Structure

One of the biggest improvements is penalty transparency. Under the proposed framework, standardized penalties apply for the most recent six years:

• Late-filed returns: Failure-to-file penalties apply; failure-to-pay penalties do not

• Amended returns: 20% accuracy-related penalty per year

• FBAR violations: Per-year penalties, adjusted for inflation

• International information returns (5471, 8865, etc.): Up to $10,000 per form, per year

Are these penalties steep? Yes. But at least clients can calculate their exposure before deciding whether to come forward. That's a massive improvement over the current "guess and hope" dynamic.

Why the IRS Is Doing This Now

The IRS is dealing with staffing shortages, a growing tax gap, and declining VDP participation. A simpler program means more voluntary compliance, fewer enforcement actions, and more revenue without adding agents.

It also signals something important: the IRS would rather collect the money than prosecute. If your clients have offshore issues, the IRS is making it easier to come in from the cold.

What CPAs Should Do

This is client-review time. The proposed changes create a clear window of opportunity for clients who've been on the fence about disclosing offshore accounts or income.

Ask yourself: do you have clients with foreign bank accounts above the FBAR reporting threshold ($10,000)? Foreign business interests they haven't reported? Foreign investments with undisclosed income? If the answer to any of those is yes — and the failure might be considered willful — they need to know this is coming.

A few practical steps:

1. Don't wait for finalized guidance — the IRS has signaled direction, and the process is expected to be formalized soon. Pre-position clients now.

2. Get foreign account details — FBAR and FATCA compliance are the core of most voluntary disclosures. Know what your clients hold before you engage.

3. Calculate exposure before disclosing — the new penalty framework makes this possible in a way it wasn't before. Run the numbers.

4. Consider criminal exposure carefully — the VDP is run through CI for a reason. Clients with potentially willful violations need an attorney in the loop, not just a CPA.

The Bottom Line

The IRS is making it easier to fix offshore tax problems voluntarily. That's good news for CPAs and their clients. The window won't stay open forever — once this program gets finalized and enforcement ramps up, the calculus changes.

If you have clients with unreported foreign income or accounts, this is the moment to have the conversation.

Source: IRS announcement, December 22, 2025. Proposed guidance. Final rules expected in 2026.