The IRS Has a Chance to Fix Its Voluntary Disclosure Program

The IRS voluntary disclosure program, intended to be a tool to bring tax cheats back into compliance, has become so punitive and high-risk that it undermines its own purpose.

Now, with proposed reforms including a more structured penalty framework and streamlined processing finally on the table, the agency has a rare opportunity to turn it into a fair and functional path back into the system.

Taxpayers are expected, under penalty of perjury, to submit a sworn narrative detailing their misconduct, disclose every crypto wallet they’ve ever touched, and commit to paying their entire liability with no guarantee their application for consideration will be approved.

Revisions will be under public review until March 2026, making this the best time to fix what likely has become deterrent to compliance rather than a tool to achieve it—and to build a disclosure process that is fair, accessible, and effective.

To build on the proposed revisions, the IRS will still need to take meaningful additional steps: Relax rigid payment rules, scale back crypto reporting traps, and rethink its one-size-fits-all penalty structure. Unless these changes go deep, the program will continue to scare the wrong people away and chase tax cheats back into silence.

The IRS deserves credit for removing the “willfulness checkbox” from Form 14457, which for the previous year required taxpayers to admit to willful criminal conduct just to be considered for the program. That little box turned the entire form into a legal trap—a pre-investigation confession with no procedural safeguards, no right to appeal, and no assurance the IRS would even accept your disclosure.

Even without the checkbox, the form still requires taxpayers to submit what amounts to a signed, sworn narrative of their noncompliance: when it occurred, how much income was omitted, and what steps they took to conceal said income, among other elements. This narrative may no longer require a “willful” admission to every action taken, the taxpayer still is expected to confess to how they broke the law.

There is a reason the National Taxpayer Advocate flagged the checkbox in her 2024 report as one of the most serious problems facing taxpayers. When the line between cooperation and self-incrimination thins, even good-faith taxpayers may choose to stay silent. That means fewer disclosures, less compliance and, consequently, less revenue recovered.

The process has gotten more complicated. The voluntary disclosure program has never been straightforward, but the rise of digital assets has made it virtually impossible to navigate without risking self-incrimination or misstatement.

Form 14457 historically required taxpayer to submit a detailed account of their noncompliance, including income, unreported accounts, and an explanation of conduct. That was risky enough. The IRS has expanded, and may further refine, the form’s scope to include an exhaustive accounting of digital asset activity.

Taxpayers must now disclose wallet addresses, transaction hashes, mixer usage, aliases, and decentralized platforms—all in their opening communications with the agency. This theoretically helps the IRS identify bad actors at the outset. In practice, it invites legal disaster and creates an administrative quandary for the taxpayer.

Digital asset reporting often is fragmented across platforms, wallets, and time zones. Even a well-intentioned taxpayer can overlook a dormant wallet or misclassify a transaction.

As a whole, the message seems clear: Unless you have a forensic accountant, blockchain team, and white-collar defense lawyers on retainer, it may be safer not to disclose at all. That’s not how to run an effective voluntary compliance system, though.

Even if a taxpayer can successfully map their digital asset history, they face one final barrier—the IRS wants its money up front. The new proposals continue to require full payment of tax, penalties, and interest, which can include the 75% civil fraud penalty. There is still no mention of a right to appeal, no opportunity to make an offer to compromise. At best, taxpayers might get an installment agreement.

The result is a pay-to-play system that privileges wealth over cooperation and seems built to chase off anyone facing financial uncertainty.

To its credit, the proposed revisions introduce a clearer, more predictable penalty structure. But predictability isn’t synonymous with fairness—even a uniform 20% penalty across the board fails to account for scale, intent, and complexity in each underlying case.

The taxpayers most likely to benefit from disclosure are often those who can’t write a six-figure check on a whim. By offering no flexibility, the program leaves these taxpayers facing the same risks they want to avoid: audits, investigations, and criminal charges.

Making compliance irrational is never good policy.

No one is suggesting that taxpayers should be encouraged to underreport income, hide assets, and then simply “true up” years later without consequence. But there is plenty of daylight between not punishing tax cheats at all and designing a disclosure program so unforgiving, complex, and financially inequitable that it drives even well-intentioned taxpayers underground.

There is a solution. First, the IRS should introduce more flexible payment terms—including offers in compromise and realistic installment options for taxpayers with limited resources. Providing those terms at the outset gives disclosing taxpayers some options.

From there, the agency should adopt a tiered penalty structure that accounts for the nature and severity of the misconduct—distinguishing between complex long-term evasion and one-time, but nonetheless willful, lapses. This is doubly true for newer asset classes such as crypto. A uniform fraud penalty that applies to the wide spectrum of potential tax misbehavior makes little sense from a fairness perspective.

Finally, the IRS must streamline its digital asset disclosures, requiring only essential wallet data during preclearance and then reserving granular reporting for later stages, once the taxpayer has been initially accepted. Front-loading technical disclosures raises legal risks and deters participation from taxpayers with even a modest amount of crypto exposure.

The proposed changes are a start, but only that. Without flexible payment terms, tailored penalties, and increased clarity around digital assets, the program may remain a chained gate disguised as an open door. The IRS is taking comments—and it should also take advice.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social.

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