Tax Law Center Blog

On December 22, 2025, the Internal Revenue Service announced a 90-day public comment period on a proposed revised Voluntary Disclosure Practice (“VDP”). The VDP is a compliance program designed for taxpayers who have willfully failed to comply with tax laws and face potential criminal exposure. By proactively and truthfully disclosing their noncompliance before an investigation begins, participants can generally avoid criminal prosecution and successfully resolve their tax liabilities.

The IRS proposal outlined significant changes in three broad areas: disclosure and compliance requirements, the penalty framework, and application and processing procedures. The IRS framed the proposal as an effort to “further incentivize non-compliant taxpayers to come into compliance”, a stated goal that practitioners and taxpayer advocates have long shared.

On March 22, 2026, the American Bar Association (ABA) Section of Taxation submitted a detailed 53-page comment letter responding to the proposal. Parag P. Patel of Patel Law Offices served as one of the principal authors of the ABA comments. The letter offers thirty substantive recommendations spanning every dimension of the proposed program and reflects the collective experience of dozens of practitioners who regularly guide clients through the complexities of voluntary disclosure.

KEY THEMES IN THE ABA COMMENTS

• Remove the absolute full-payment-within-90-days requirement as a condition of VDP eligibility
• Limit income tax and FBAR penalties to a three-year period rather than six years across the board
• Confirm FBAR penalties will be assessed as non-willful at the unadjusted $10,000 statutory maximum
• Preserve the two-step preclearance process; do not combine Parts I and II into a single submission
• Expand VDP access to all taxpayers, not only those who can self-certify willfulness
• Adopt a certification process rather than traditional examinations for most disclosures
• Establish clear timelines for case closure, target four to six months, hard cap at three years

The Full-Payment Requirement: A Barrier to Compliance

Perhaps the most consequential criticism in the ABA comments concerns the proposal’s requirement that taxpayers pay all tax, penalties, and interest in full within three months of conditional acceptance. Under the proposed terms, a taxpayer who cannot satisfy this requirement in full, regardless of the reason, is simply ineligible for VDP. The IRS confirmed this reading explicitly in its FAQ: “No. Full payment within three months of clearance is required.”

The comments argue forcefully that this approach is both unfair and counterproductive. A taxpayer unable to pay immediately will be equally unable to pay after a criminal investigation or civil examination, but the government will have expended far greater enforcement resources to reach the same result. As the comments note, excluding taxpayers based solely on their ability to pay at inception means that VDP is effectively available only to those wealthy enough to afford it. The ABA recommends that taxpayers who cannot pay in full be referred to the IRS Collection function for installment or other payment arrangements, rather than being turned away from the program entirely.

“Requiring full payment within three months automatically bars anyone without immediate access to funds from participating, without any consideration given to specific facts and circumstances, or the Service’s own interest in collecting what it can.”

A Penalty Framework That Discourages Rather Than Incentivizes

The proposed VDP replaces the current single-year 75% civil fraud penalty with per-year accuracy-related and failure-to-file penalties applied across the full six-year disclosure period. While each individual penalty rate is lower, the ABA’s mathematical analysis demonstrates that the aggregate result often exceeds what taxpayers faced under the prior framework. A taxpayer with six years of consistent $100,000 annual liabilities would owe roughly $120,000 in accuracy penalties under the proposal, sixty percent more than under the regime it replaces.

To correct this, the ABA recommends limiting income tax penalties to the three most recent years (or the three highest-liability years) within the disclosure period, or alternatively capping total income tax penalties at 75% of aggregate tax liability across all disclosure years. On FBARs, the comments urge the IRS to formally confirm what Acting Chief Tax Compliance Officer Jarod Koopman stated publicly in January 2026: that the proposed VDP will apply one non-willful, inflation-adjusted penalty per year. The ABA further recommends that this penalty be calculated at the unadjusted $10,000 statutory maximum, formalizing existing examiner practice and sparing taxpayers from complex historical inflation calculations, and that FBAR penalties be similarly limited to three years rather than six.

Protecting Taxpayers During Preclearance

The proposal appears to contemplate merging the current two-step preclearance and disclosure process into a single, simultaneous electronic submission. The ABA comments strongly oppose this change. The preclearance step exists precisely to allow taxpayers to learn whether they are eligible for VDP before committing the most sensitive and potentially incriminating information to a government record. Combining Parts I and II would force taxpayers to provide a full willfulness narrative and detailed financial schedules before knowing whether the IRS will even accept them into the program, information that could be used against them in a civil examination or criminal investigation if preclearance is denied.

The comments also recommend significant streamlining of the information currently required at Part I. Detailed schedules of digital asset transactions, foreign account numbers and dates, and entity ownership structures have no bearing on the preclearance eligibility determination and should be deferred to Part II or the examination stage. Limiting Part I to what CI genuinely needs, legal source of income, timeliness of the disclosure, and basic identifying information, would reduce burden, minimize self-incrimination risk, and encourage more taxpayers to take the first step.

Broader Access and Fairer Process

The ABA comments also call for expanding VDP eligibility beyond taxpayers who can affirmatively admit willful noncompliance. In practice, many taxpayers face real criminal exposure while genuinely disputing whether their conduct meets the legal standard for willfulness. Denying these taxpayers access to VDP, while allowing clearly willful taxpayers to participate, creates a perverse asymmetry. The comments propose an alternative: a disclosure statement in which a taxpayer acknowledges the existence of facts that could be viewed as evidence of willfulness, without requiring an explicit admission of subjective intent. This approach would preserve the integrity of VDP while opening its protections to a broader population of taxpayers who want to come into compliance.

On the processing side, the comments call for a formal certification process modeled on the successful OVDP framework from 2009–2018, under which most disclosures were reviewed and closed without a full examination, along with published timelines, electronic case-status portals, and a simplified Form 906 template to accelerate case closure. Between fiscal years 2018 and 2024, only 161 VDP cases were fully closed. The ABA’s recommendations, taken together, are designed to increase that number dramatically.

What This Means for Our Clients

The IRS has not yet finalized the revised VDP, and the comment period has now closed. Practitioners and taxpayers alike should monitor the IRS’s response carefully. If adopted, even a portion of the ABA’s recommendations could make voluntary disclosure a viable option for a significantly larger group of taxpayers, particularly those with offshore accounts, digital asset activity, or international information return obligations who have been deterred by the cost and unpredictability of the current program. Patel Law Offices will continue to track these developments and advise clients accordingly.

Taxpayers currently weighing whether to come forward, or who are already in the VDP pipeline under the old framework, should consult with qualified tax legal counsel before the new VDP rules are finalized.