Before the Knock at the Door: Why Taxpayers Should Act Now Under the IRS Voluntary Disclosure Program

For taxpayers with unresolved issues with the IRS, the best time to address them is about to be now, before any special agent “knocks at the door.”

On December 22, 2025, IRS Criminal Investigation (IRS-CI) proposed updates to its Voluntary Disclosure Practice (VDP) and opened a public comment period through March 22, 2026. The proposal allows taxpayers with criminal tax exposure to come forward, correct past noncompliance, and significantly reduce the risk of prosecution. But this window only stays open until the government finds the taxpayer first.

At the same time, the broader environment is shifting: although the IRS is facing staffing and budget pressures that can translate into fewer examinations and slower case development in some areas, criminal tax risk has not disappeared, but has shifted toward reliance on third-party reporting, whistleblowers, and parallel investigations. Right now, the VDP can provide a good opportunity to clean up legacy issues before enforcement priorities shift again or third-party information reaches the government and closes the window.

What IRS-CI Proposes

VDP takes a “carrot-and-stick” approach.

The stick:

• Disclosure of past returns. The VDP requires participants to disclose the prior six years of tax returns, regardless of whether the returns were accurate. Not an unreasonable “ask,” since the statute of limitations for the government to bring a criminal tax case is generally six years.
• Timely compliance. Taxpayers who are conditionally approved must act quickly and file required returns and pay taxes, penalties, and interest within three months (or otherwise make arrangements).
• Predictable penalties. The proposal establishes a clearer penalty framework by explaining how accuracy-related penalties apply to amended returns, how failure-to-file penalties apply to delinquent returns, and how FBAR and international information returns will be addressed.

But here’s the carrot: In exchange, taxpayers who fully comply will not be recommended for criminal prosecution.

What VDP Is and Is Not

VDP is aimed at taxpayers who have criminal exposure due to willful violations (i.e., an intentional decision not to report income, assets, or other required information to the IRS). The program is not the right tool for every mistake, but it can be an effective approach when the facts point to willfulness.

Key guardrails:

• Participants must make a disclosure that is truthful, timely, and complete. They must cooperate fully and either pay what they owe or make a full-pay arrangement with the IRS.
• The disclosure must be made before the IRS initiates or notifies the taxpayer of a civil exam or criminal investigation. If the IRS has already received information through a third party or obtained it through enforcement steps like a summons or search warrant, the taxpayer is out of luck and will not qualify for VDP.
• The VDP is not available for reporting illegal-source income, including income from activity that is legal under state law but illegal under federal law, such as income from marijuana dispensaries.
• Participation does not guarantee immunity. Although not an amnesty program, a taxpayer’s participation in VDP has historically weighed against prosecution if disclosures are timely and complete. IRS-CI will consider a taxpayer’s participation in VDP when deciding whether to recommend prosecution, but it retains discretion in every case.

“Less Enforcement” Does Not Equal “Low Risk”

Even if the IRS initiates fewer civil examinations of tax returns (audits), criminal tax risk often comes from places that don’t depend on random audit selection: third-party reporting, informants/whistleblowers, parallel investigations (fraud, money laundering, public corruption), data analytics, bank records, and international information flows.

It’s no secret that the IRS has experienced significant workforce reductions. That can create a false sense of security — but when enforcement resources are constrained, agencies often prioritize “cleaner,” more provable cases and cases with strong paper trails. VDP can be a strategic way to get ahead of that risk when exposure is real.

In short, from a civil exam perspective, it is never a good strategy to play the audit lottery. And from a criminal perspective, having fewer resources does not translate into low risk. Once the IRS initiates a criminal examination, it is too late. Taxpayers can’t buy their way out of jail by offering to pay the tax and come into compliance.

What Clients Should Do Now

If you think VDP might be an option, speed and discipline matter. Here’s the typical recommended sequence:

• Stop the bleeding. Get current and stay current going forward. That means filing current-year returns, making estimated tax payments or payroll deposits, and complying with information-reporting requirements. Ongoing noncompliance is fuel on the fire.
• Do a privilege-protected fact assessment. Before anyone “calls the IRS,” you may wish to get an attorney involved to assess willfulness indicators, scope, and risks — including non-tax exposure (e.g., false statements, structuring, wire issues). An attorney can guide you from start to finish, including preparing the initial disclosure, organizing the factual narrative, coordinating with the IRS’ civil exam team, and developing a payment strategy.
• Preserve and gather records, like bank statements, crypto exchange records, accounting files, entity documents, foreign account records, communications with preparers/promoters, and any prior filings.
• Plan for payment. Under the proposal, conditional approval triggers a three-month clock to file and pay. Even under current practice, you should assume the government will expect a credible, funded path to full payment of all money owed.

Takeaways

The key point is timing: Enforcement levels may fluctuate, but the consequences of willfully not complying with the tax law do not. VDP is most valuable before any “knock at the door” arrives in the form of a visit from a special agent, third-party record submission, a collections inquiry, or an audit notice. VDP remains the most direct path for taxpayers who need to clean up with the IRS while substantially reducing criminal risk. For the right client, what is “knocking” can be an opportunity.