Most CPAs are by now familiar with the IRS’s heavily publicized Offshore Voluntary Disclosure Program (OVDP), which allows taxpayers with previously undeclared foreign assets to file amended tax returns and delinquent information returns in exchange for immunity from criminal prosecution and reduced civil penalties. Many, however, are unaware that the IRS has a long-standing policy permitting general voluntary disclosures involving domestic tax issues.

Many taxpayers engage CPAs because of unfiled tax returns or unreported domestic income. The default strategy in such cases tends to be to amend and correct the taxpayer’s returns for the three most recent years—commonly referred to as a “silent disclosure”—and hope for the best. Making an affirmative voluntary disclosure, however, will allow a CPA to engage directly with IRS from the beginning and will often help mitigate penalties. Moreover, proceeding under the IRS’s voluntary disclosure program is an especially attractive option for taxpayers with substantial past noncompliance that puts them at risk of a criminal investigation. Unlike the rigid protocols found in the OVDP, a domestic voluntary disclosure affords some flexibility and empowers revenue agents with more discretion in making penalty determinations. Details concerning the IRS’s domestic voluntary disclosure practice are set forth at section of the Internal Revenue Manual, but the primary aspects are described below.

Basic Requirements

There are four broad requirements for proceeding with a voluntary disclosure:

  • First, the voluntary disclosure must be timely. That is, a tax-payer who wishes to make a voluntary disclosure may not be the subject of an audit or investigation at the time that the tax-payer initiates the voluntary disclosure.
  • Second, the income that is the subject of the voluntary disclosure must come from legal sources. Simply put, the unreported income must have been derived from legal activity and not from such activities as illegal drug or firearm sales, illegal gambling, or insider trading. The mere fact that the income was not initially reported on the taxpayer’s income tax return does not render it illegal.
  • Third, the taxpayer must fully cooperate with the IRS and file completely accurate amended tax returns (or, in the case of a nonfiler, original tax returns). This means that a taxpayer proceeding with a voluntary disclosure must properly report all income and deductions. The taxpayer cannot choose which items to report properly; every item on the return must be accurate.
  • Fourth, the taxpayer must pay all liabilities resulting from the voluntary disclosure or make good-faith arrangements to pay those liabilities. These liabilities may include tax on previously unreported income, penalties, and interest.

Lookback Period

The IRS does not require that a taxpayer proceeding with a voluntary disclosure file original or amended tax returns for a specific period. In general, however, it is advisable that the taxpayer file for the preceding six years, which is the statute of limitations for most criminal tax offenses.


There are numerous penalties that the IRS may, at least theoretically, impose under the tax code, even in cases where a taxpayer has made a voluntary disclosure. In general, however, a taxpayer who has followed the formal voluntary disclosure procedures and who has cooperated with the IRS will face: 1) no penalties, 2) accuracy-related penalties pursuant to IRC section 6662 that are equal to 20% of the unpaid tax, or 3) fraud penalties pursuant to IRC section 6663 that are equal to 75% of the unpaid tax.

In most voluntary disclosure cases, the taxpayer’s representative will negotiate the issue of penalties with the revenue agent assigned to the case. For example, if the overall tax loss is minimal, or if the facts of the case indicate that the taxpayer simply made a good-faith error, it is possible that no penalty will be imposed. In a more egregious case, the IRS may determine that the fraud penalty is appropriate, but the representative may be able to persuade the revenue agent that the penalty should be imposed for just one of the years for which original or amended tax returns have been filed.


A taxpayer may proceed under the formal voluntary disclosure protocol by contacting the IRS’s Criminal Investigation (CI) Division and indicating that he wishes to make a voluntary disclosure. CI will then check IRS databases to confirm that the taxpayer is not currently under audit or investigation. Assuming that he is not, CI will contact the taxpayer and advise that he is cleared to proceed. The tax-payer will then submit a formal letter to CI setting forth, inter alia, the reasons for submitting a voluntary disclosure and an estimate of the total annual unreported income during the disclosure years.

If the taxpayer is accepted into the voluntary disclosure program (i.e., if the disclosure was timely and the unreported income was derived from legal sources), CI will transfer the matter to the civil division of the IRS for resolution and direct the taxpayer to an address where original or amended tax returns should be sent.


The primary benefit of making a voluntary disclosure is that the IRS will not refer a taxpayer who comes clean voluntarily for criminal investigation. Although the IRS stresses that a voluntary disclosure does not automatically guarantee immunity from prosecution, as a practical matter, taxpayers who comply with the voluntary disclosure requirements discussed above will not face a criminal inquiry.

A secondary benefit of making a voluntary disclosure is that the taxpayer is in a better position to negotiate for reduced, or even waived, penalties. For example, in most routine voluntary disclosure cases, the fact that the taxpayer took the initiative to contact the IRS and filed original or amended returns without the threat of an audit or a criminal investigation will provide the taxpayer with a persuasive basis to argue that fraud penalties would be inappropriate.

In light of these benefits, CPAs whose clients find themselves in the position of having unreported income should consider advising them to take full advantage of this program.

Brian P. Ketcham, JD is an associate with Kostelanetz and Fink LLP, New York, N.Y.