The IRS Streamlined Procedure vs. the Voluntary Disclosure Program

March 14, 2025
The IRS Streamlined Procedure vs. the Voluntary Disclosure Program

Introduction

U.S. taxpayers who have failed to report foreign income or disclose foreign assets may face significant penalties from the IRS. To encourage compliance, the IRS offers two key programs for taxpayers to correct past tax noncompliance: the Streamlined Filing Compliance Procedures (SFCP) and the Voluntary Disclosure Program (VDP). Each program is designed for different situations, and choosing the right one depends on whether the taxpayer’s noncompliance was willful or non-willful.

 

This article compares the IRS Streamlined Procedure and the Voluntary Disclosure Program, helping taxpayers understand their options for becoming compliant while minimizing penalties.

 

1. What is the IRS Streamlined Procedure?

The Streamlined Filing Compliance Procedures (SFCP) are intended for taxpayers whose failure to report foreign income or assets was non-willful. This means the taxpayer did not intentionally evade taxes but may have been unaware of their filing obligations.

Key Features of the Streamlined Procedure

  • Eligibility: Taxpayers must certify that their failure to report income or file foreign asset disclosures was non-willful.
  • Tax Return Filing: Requires filing three years of amended tax returns (Form 1040X) and six years of FBARs (Foreign Bank Account Reports).
  • Penalties:
    • For U.S. Residents: A 5% penalty on the highest aggregate balance of foreign financial accounts.
    • For Non-U.S. Residents (Streamlined Foreign Offshore Procedure): No penalties applied.
  • Simplified Process: Unlike the Voluntary Disclosure Program, this process involves minimal IRS scrutiny.

 

2. What is the IRS Voluntary Disclosure Program?

The Voluntary Disclosure Program (VDP) is designed for taxpayers who may have engaged in willful tax noncompliance—meaning they knowingly failed to report income, file required tax forms, or disclose foreign assets

Key Features of the Voluntary Disclosure Program

  • Eligibility: Taxpayers who deliberately failed to comply with U.S. tax laws, including those who used offshore accounts to evade taxes.
  • Tax Return Filing: Requires filing six years of amended tax returns and FBARs.
  • Penalties:
    • Civil penalties are assessed on unpaid taxes and unreported accounts.
    • Lower risk of criminal prosecution if disclosure is made before an IRS investigation begins.
  • More IRS Scrutiny: Requires an in-depth review and negotiation with the IRS.

 

3. Key Differences Between the Two Programs

FeatureStreamlined ProcedureVoluntary Disclosure Program
Best forNon-willful taxpayersWillful taxpayers
Number of Tax Years Filed3 years of tax returns & 6 years of FBARs6 years of tax returns & FBARs
Penalty Structure5% for U.S. residents, 0% for non-residentsAssessed on a case-by-case basis
IRS ScrutinyMinimalHigh (full IRS review)
Criminal ProtectionNot applicableCan help prevent prosecution

 

4. Choosing the Right Program

  • Taxpayers who accidentally failed to report foreign income or accounts should consider the Streamlined Procedure.
  • Taxpayers who knowingly concealed income or assets should use the Voluntary Disclosure Program to reduce penalties and avoid criminal charges.
  • Consulting a tax professional is essential to ensure compliance and minimize risks.

 

Conclusion

The IRS Streamlined Procedure and Voluntary Disclosure Program provide taxpayers with options to correct past tax noncompliance, but the choice depends on whether the noncompliance was willful or non-willful. Understanding the differences between these programs is crucial in determining the best course of action.

 

Tax Partners can help taxpayers navigate these IRS programs, ensuring compliance while minimizing penalties.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

 

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