IRS Overhauls Voluntary Disclosure Program, Offering Reduced Penalties and Faster Resolution for Digital Asset Holders

The Internal Revenue Service (IRS) is preparing to implement significant changes to its Voluntary Disclosure Program (VDP), aiming to reduce penalties and expedite resolution times for taxpayers, including those with unreported digital asset gains. The overhaul is expected before December.

This revised VDP is designed to make it easier for taxpayers to come forward with past tax omissions without facing prohibitive penalties. IRS Criminal Investigation Chief Jarod Koopman announced the revamped program at the UCLA Extension Tax Controversy Conference, outlining a target of resolving voluntary disclosure cases within 120 days of a completed submission. This represents a substantial reduction from the current process, which can often extend beyond a year.

Key Changes to the VDP

The updated program will feature lower penalties across the board and introduce more flexible payment structures, such as installment plans and offers in compromise. These payment options are intended to assist taxpayers who owe back taxes but may not be able to afford a lump-sum payment, potentially making participation in the program more accessible.

Digital asset transactions will be integrated into the general VDP framework. this may indicate that taxpayers disclosing unreported income from crypto activities will benefit from the same streamlined process, shorter timelines, and reduced penalties as those disclosing other types of assets, aligning the treatment of digital assets with that of traditional asset classes.

Broader Compliance Landscape

The IRS is also introducing new Form 1099-DA reporting requirements for 2025, which will require custodial platforms to report digital asset sales directly to the agency. This change, along with proposed congressional legislation, is creating increased pressure for taxpayers to address any past non-compliance.

Congress is also advancing measures related to digital asset taxation. Section 502 of the Digital Asset Tax Certainty Act has passed the House Ways and Means Committee and proposes a distinct disclosure option for digital asset violations. Under this proposal, eligible filers could potentially face penalties as low as 0% on the first $25,000 of tax deficiency, provided certain conditions are met. However, the specific conditions for this penalty reduction remain uncertain.

Addressing Current Deterrents

The current voluntary disclosure process has been criticized for its lengthy timelines, potentially high penalties, and overall uncertainty, leading some tax professionals to advise clients to carefully consider their options. The extended resolution periods can also incur additional compliance costs and legal fees for taxpayers.

By reducing the resolution time to 120 days, the IRS aims to remove one of the primary deterrents to voluntary disclosure. A faster and potentially less costly VDP is intended to lower the financial exposure for taxpayers before issues escalate into criminal investigations rather than civil tax disputes.

For individuals holding digital assets, the upcoming changes offer a clearer path forward. The combination of the revised VDP, the proposed legislative provisions, and the new 1099-DA reporting regime signifies a coordinated federal effort to improve tax compliance for digital assets, bringing it more in line with the treatment of other asset classes. The exact implementation date for the revamped VDP is not yet specified, beyond being expected before December.

Why This Matters

The materials describe a narrow update: The IRS is revising its Voluntary Disclosure Program (VDP) to offer lower penalties, more flexible payment options, and a target resolution time of 120 days, down from over a year. Specific conditions for eligible filers to face 0% penalty on the first $25,000 under the proposed Digital Asset Tax Certainty Act.

Broader Context

Source materials place the factual news in this context: The IRS is preparing to make it significantly easier for taxpayers, including crypto holders, to admit past tax mistakes without facing the kind of penalties that have historically made voluntary disclosure feel like a financial punishment.