IRS voluntary disclosure: how to come clean on unreported foreign accounts
Missed reporting foreign accounts or income? This guide explains IRS voluntary disclosure, who it’s for, and how to fix past filings step by step.
If you’re an American living abroad or working remotely, managing your finances across countries can get complicated fast. Opening a foreign bank account feels like a simple, practical step. What’s often not realised, however, is the extra reporting required on such foreign accounts with the U.S. government.
Many individuals miss some or all of these requirements. Some are simply unaware of the FBAR and/or FATCA requirements, while others incorrectly assume that their payment of local taxes is all that is required, and simply miss the filing requirements.
Even if your intention is to leave previously hidden foreign accounts dormant, the IRS and other foreign governments are likely to encourage you to reveal these accounts and repay any associated taxes, penalties, and interest. If the accounts are not properly reported, there is potential for penalties and interest, which can further escalate into full-blown legal issues.
You may have heard that past offenses can’t be corrected, but there is hope for taxpayers with previously unreported foreign accounts. IRS Voluntary Disclosure is a process the IRS offers that allows taxpayers to come forward and fully report all their foreign assets to obtain lenient civil penalties for prior non-disclosures.
This guide explains how condensation settlement occurs, who may be affected, and what to expect during the settlement process.
If you’ve failed to report foreign bank accounts or income to the IRS, you’re not alone, and there are ways to fix it. The IRS voluntary disclosure process allows you to come forward before the IRS contacts you, report what was missed, and resolve the issue.
The right path depends on your situation. If your mistake was unintentional, you may qualify for streamlined procedures with lower penalties. More serious or potentially willful cases may require formal voluntary disclosure.
The process typically involves reviewing your financial history, submitting corrected filings for past years, and paying any taxes, interest, and applicable penalties.
Ignoring the issue increases risk, especially since foreign banks often report account data to the IRS under FATCA.
If you’re unsure where you stand, start by understanding your obligations and consider getting guidance to choose the right approach.
What is IRS voluntary disclosure?
The IRS voluntary disclosure program is a process that allows taxpayers with unreported income, previously unknown assets (e.g., offshore accounts), or previously unknown accounts to come into compliance by filing with the IRS.
This must be done voluntarily, before the IRS discovers the missing items, and therefore, it gets its name. While voluntary disclosure may seem simple, such as filing a late return or missing a form, it is actually much more structured and involved.
Unlike submitting a late tax return or an omitted form, voluntary disclosure involves not only the submission of accurate and complete returns, but also a voluntary approach to resolving the matter before discovery. Once you notify the IRS of your intent to come into compliance, you must provide complete and accurate financial data and walk through a specific process designed to assist in the return to tax compliance.
This agreement is used when the IRS would consider the noncompliance severe, i.e., potentially even willful.
The purpose of the Voluntary Disclosure Program is to assist taxpayers who wish to return to compliance and avoid more serious consequences.
Who should consider voluntary disclosure?
You may want to explore voluntary disclosure if you’ve had foreign financial activity that was not properly reported to the IRS.
Common situations include:
- Foreign bank or investment accounts that were never disclosed
- Missed FBAR filings (FinCEN Form 114)
- Unreported foreign income (freelance work, rental income, dividends)
- Failure to file FATCA-related forms such as Form 8938
This can apply to a wide range of people:
- Digital nomads managing income across multiple countries
- Freelancers paid into non-U.S. accounts
- Expats who assumed local taxes replaced U.S. obligations
- Individuals who inherited or opened accounts abroad
The key factor is whether the non-compliance is willful or potentially willful, which brings us to an important distinction.
Voluntary disclosure vs other IRS options
The IRS offers several options to address prior filing errors and omissions. One option is the IRS’s voluntary disclosure program.
For less-risky errors (e.g. unintentional mistakes), taxpayers may be eligible for the streamlined procedures, designed for non-willful errors, with reduced penalties and a simpler process.
While some people may have reported their income accurately, they may have missed other important forms, such as the FBAR. In these cases, additional procedures may be required.
Voluntary disclosure is typically used for more complex or higher-risk cases. Each form of disclosure has its own requirements and expectations and can yield different results.
Understanding willful vs non-willful behaviour
The IRS distinguishes between willful and non-willful behaviour when assessing violations of foreign account reporting requirements.
Non-willful
- You were unaware of reporting requirements
- Mistakes were due to negligence or misunderstanding
- No intent to conceal income or assets
Willful
- You knew about the reporting requirements but chose not to comply
- You took steps to hide accounts or income
- You ignored clear obligations
In practice, this distinction is not always straightforward. The IRS looks at facts, behaviour patterns, and available evidence when making this determination.
Because of this complexity, properly assessing your situation is one of the most important steps before proceeding.
How the voluntary disclosure process works
The voluntary Disclosure Process (VP) is a fixed, fairly straightforward process. First, the officer reviews your file and past activities.
Identifies what is missing from prior FBAR and Foreign Account Tax Compliance Act (FATCA) filings. Collects necessary documentation, including prior filings, personal bank account statements, retirement statements, and any other source of foreign-earned income, including rental properties. Ensures all prior years are addressed, especially those in which income was earned but the years missed are unknown.
Usually, before filing a formal application for the IRS Voluntary Disclosure Program, the individual must pre-clear their matter with the IRS Criminal Investigation department. This provides the individual with preliminary clearance to come forward and begin the voluntary disclosure application process.
Once preclearance is granted, formal disclosure begins, during which a detailed account of the situation will be provided, along with an explanation of the events that contributed to the student's noncompliance.
Following your completion of the voluntary disclosure agreement, you will be required to file amended tax returns for prior years, as well as file FBARs for all prior years for which you failed to file, reporting all previously unreported income.
After SB/SE resolution, they review for any outstanding liabilities, including any tax, interest and/or penalties that may be due. Once all of these items have been addressed, they issue a final resolution of the case.
What penalties can apply?
The penalties for unreported foreign accounts can vary widely depending on specific factors.
These can include unpaid tax, plus penalties and interest. They can also include failure to report penalties for failing to report foreign financial accounts and assets. In severe cases, SB/SD may also raise concerns about the enforcement of such obligations in the United States.
Voluntary Disclosure does not guarantee a penalty-free pass, but it is a means to address potential issues proactively rather than have the IRS discover them.
What happens if you don’t take action?
You might be tempted to ignore the issue if you haven’t heard from the IRS, but the ability to detect these items has been getting better over time.
The information you never sent (but were required to send) about your foreign-finied (i.e. held at a foreign financial institution) accounts might be reported by those foreign institutions to the IRS and other countries under the provisions of FATCA.
More than a few foreign banks reportedly are sharing that information with the IRS as required, so even if you did not submit your Forms 8938 or Foreign Certification for Form 8938 as required, your information may already have been turned in.
If the IRS discovers the noncompliance before you voluntarily come forward, the situation can become more complicated, and penalties can increase. Few options for correction will be available to the taxpayer.
Many risks are easier to address early, before they become bigger problems.
How long does the process take?
Voluntary disclosure is not a quick fix. The timeline can range from several months to over a year.
Factors that influence timing include:
- Complexity of your financial situation
- Number of years involved
- Responsiveness to IRS requests
Being organised and proactive can help avoid unnecessary delays.
Do you need professional help?
Voluntary disclosure is a multi-step process that requires classification of your particular situation. Many taxpayers choose to seek the assistance of a tax professional to facilitate this process.
This call can be particularly helpful if you are unsure whether your case has been designated as willful or non-willful, or if you are located outside the US and your assets or income are distributed worldwide.
We also offer assistance, which can help to reduce the risk of error and make the process easier to manage while preparing disclosures and any amended filings.
How SavvyNomad can help
For Americans living abroad, staying on top of U.S. tax requirements can feel overwhelming. Between foreign accounts, reporting rules, and filing deadlines, it’s easy to fall behind.
SavvyNomad simplifies this process by providing guidance on expat tax requirements and helping you organise your financial information. With a clearer understanding of what needs to be done, it becomes easier to move forward and address past filings.
Conclusion
Realising that you’ve missed reporting foreign accounts can be stressful, but it’s not uncommon. Many Americans abroad face the same situation at some point.
The IRS voluntary disclosure process offers a structured way to address the issue and move toward compliance. While the process takes time and requires effort, it allows you to take control of the situation rather than leaving it unresolved.
If you’re unsure where to start, reviewing your financial history and understanding your options is a good first step. From there, you can decide how to proceed based on your specific circumstances.
FAQs
What is the IRS voluntary disclosure programme?
The program allows taxpayers with unreported income or undeclared foreign financial accounts to come into compliance with U.S. tax laws before the IRS contacts them.
Can I avoid penalties through voluntary disclosure?
We are still reviewing the penalties. These will depend on individual circumstances and the type of non compliance.
What’s the difference between voluntary disclosure and streamlined filing?
FBAR and Form 8938 voluntary disclosure processes are generally reserved for higher-risk matters; non-willful errors are generally addressed through a streamlined process.
How many years do I need to report?
Each program will be different, as will the circumstances of each individual student. Generally speaking, students must complete a number of years at a time.
Will the IRS prosecute me if I come forward?
Voluntary disclosure is designed to mitigate criminal risk; however, the outcome of a voluntary disclosure matter can vary greatly from case to case.
