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In the sprawling and diverse landscape of Los Angeles, adherence to both California state and federal tax laws is paramount. As a city known for its iconic Hollywood sign and vibrant cultural scene, Los Angeles also requires strict compliance with the complex web of tax regulations governing both domestic and offshore financial activities. The Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) mandate that every taxpayer in the Golden State ensures their financial dealings are transparent and lawful. For Los Angeles taxpayers who find themselves under the scrutinizing gaze of the IRS due to undisclosed foreign accounts or unreported offshore assets generating unreported yet taxable income, the journey back to tax compliance can be daunting and intricate. The stakes are high, with severe civil tax penalties and exponentially severe criminal tax consequences potentially arising from deliberate tax non-compliance.
Should you find yourself in a situation where you’ve not fully complied with tax-related responsibilities, voluntarily disclosing this can be an essential step toward rectification. Proactively revealing missteps or intentional evasion before an audit or criminal tax investigation is underway offers a significant opportunity to return to compliance and avoid criminal prosecution for tax crimes. It’s important to understand that even if your disclosure doesn’t tick every box, your proactive and prompt action can yield positive results. Like the IRS, the State of California’s Franchise Tax Board (FTB) and the California Department of Tax and Fee Administration (CDTFA) provide a method for non-compliant taxpayers to regain compliant status by coming forward with the details of their failure to comply with the California state tax code. The path to voluntary disclosure to the FTB depends on whether you are an in-state or out-of-state filer.
At the Tax Law Offices of David W. Klasing, our trusted dual-licensed Los Angeles Voluntary Disclosure Attorneys and CPAs will offer you a systematic and secure avenue to rectify your tax status while avoiding criminal tax prosecution. Access to our services is as easy as a call to (310) 492-5583 or clicking the following link to schedule a reduced-rate initial consultation, and we will be there to address your federal and California state tax concerns, providing both legal and tax services in one place—at a single hourly billing rate.
IRS Voluntary Disclosure Practice: Reducing Criminal Tax Prosecution Risk before the IRS finds You
The IRS-CI Voluntary Disclosure Practice (VDP) provides a structured path for taxpayers with willful tax or tax-related noncompliance to come forward, cooperate, and pursue a civil resolution that can materially reduce criminal tax prosecution exposure. The IRS defines a voluntary disclosure as a truthful, timely, and complete disclosure of willful noncompliance and requires cooperation plus payment in full or a full-pay installment agreement for tax, interest, and applicable penalties. The IRS also states the limits plainly: a voluntary disclosure does not automatically guarantee immunity, but it “may result in prosecution not being recommended.”
Your disclosure only works if it is timely. The IRS treats a disclosure as timely only if it arrives before the IRS commences a civil examination or criminal investigation, receives third-party information alerting it to your noncompliance, or obtains information through criminal enforcement tools such as search warrants or grand jury subpoenas. In other words, you do not get to “wait and see” and then preserve VDP as a fallback.
Practically, as long as a taxpayer that has willfully committed tax avoidance (potentially including intentionally non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax noncompliance through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
What is an IRS Voluntary Disclosure?
Voluntary disclosure is a proactive initiative where taxpayers willingly correct past mistakes or omissions in their tax filings with the Internal Revenue Service (IRS). This action is imperative for individuals in Los Angeles who have intentionally or unintentionally failed to report income, neglected to pay due taxes, or committed similar errors, leading to accrued interest and substantial civil or criminal tax penalties.
How Does the IRS Voluntary Disclosure Practice (VDP) Work in 2026?
The IRS runs VDP through a two-part process using Form 14457. You request preclearance first (Part I). If IRS-CI preclears you, you then submit Part II for preliminary acceptance, and the IRS expects you to submit Part II within a short window after preclearance. The IRS updated and maintained the VDP page and procedures through 2025, and it continues to emphasize that you must present the matter through the designated procedures and provide a statement acknowledging willful failure to comply when the case moves to the civil examiner stage. If you present the disclosure through a representative, you should submit a Form 2848 for each taxpayer and entity, and the IRS directs representatives to fax Form 14457 Part I to the CI intake fax number listed on the VDP page.
Important eligibility constraint: the IRS states that VDP “does not apply to taxpayers with illegal sources of income,” including income that state law may treat as legal but federal law treats as illegal. If any part of your exposure touches that category, you need a risk analysis before you make a single written submission.
Why Los Angeles taxpayers Should Not Underestimate Detection Risk
Taxpayers often view Idaho Falls as “low visibility,” but modern enforcement does not rely on visibility. It depends on data matching, informant and third-party pipelines, and the IRS’s ability to build a willfulness narrative from documents, devices, and communications. IRS-CI’s FY 2025 reporting highlights the scale of its operational modernization and digital-evidence workload. Separately, the IRS has publicly described analytics-driven enforcement initiatives targeting high-income nonfilers, including a campaign that focused on roughly 125,000 cases tied to more than $100 billion in financial activity.
Digital assets also raise the baseline risk profile. Treasury and the IRS finalized rules implementing digital-asset broker reporting under section 6045, with applicability beginning for transactions on or after January 1, 2025, and additional mechanics for basis and amount realized. If your exposure includes unreported crypto gains, staking income, DeFi transactions, or offshore exchange activity, third-party reporting and blockchain analytics can converge quickly, and VDP timing can evaporate.
What are the Benefits of Voluntary Disclosure?
Through voluntary disclosure, eligible taxpayers can systematically address these issues. This approach not only mitigates the risks associated with eggshell audits, criminal tax investigations, and federal felony prosecutions but often results in reduced civil tax penalties as well. It serves as a vital safety net for individuals navigating the complexities of both domestic and offshore tax compliance challenges in Los Angeles.
Reduced Penalties
By coming forward voluntarily, taxpayers can often negotiate lower penalties than if the IRS discovers the non-compliance on its own. This can include significant reductions in underpayment and late payment penalties;
Avoidance of Criminal Tax Prosecution
One of the primary benefits is a nearly guaranteed method to avoid criminal tax charges if you meet the terms of the program. Timely and accurate voluntary disclosure offers a nearly guaranteed chance of avoiding criminal tax prosecution.
Trust and Transparency
The voluntary disclosure process fosters a cooperative relationship between taxpayers and the IRS, promoting transparency and trust. This approach helps ensure that the government receives what is rightfully owed without causing undue hardship to the taxpayer;
Preliminary Acceptance Process
Recent reforms have introduced a preliminary acceptance process that provides conditional approval once the necessary documents and estimated tax payments are submitted. This reduces uncertainty and anxiety for taxpayers, making the process more transparent and efficient;
Comprehensive Compliance
Participating in the voluntary disclosure program helps taxpayers correct past mistakes and align their tax filings with legal requirements. This is particularly important for those with complex financial situations involving domestic and offshore assets;
Confidentiality
Information disclosed through the voluntary disclosure program is generally protected under tax privacy laws, ensuring that sensitive information remains confidential, except in extremely rare cases where criminal tax prosecution becomes relevant.
Is Voluntary Disclosure Suitable for Everyone?
However, it’s crucial to acknowledge that voluntary disclosure isn’t a universal remedy. The IRS might decline some submissions; not every taxpayer’s situation suits this approach. The new Department of Justice Tax Division’s Voluntary Disclosure Policy encourages entities, including but not limited to partnerships, government entities, and unincorporated associations, to make voluntary disclosures to the Tax Division. This is advisable even if there’s suspicion that the government might already be aware of their tax misconduct. While full benefits might not be available in such scenarios, these entities can still garner some advantages, primarily in reduced tax penalties.
Choosing Between OVDP and Streamlined Disclosure: A Crucial Decision for Non-Compliant Taxpayers
Offshore Voluntary Disclosure Program (OVDP) and Streamlined Disclosure can offer non-compliant taxpayers a means to correct past inaccurate, incomplete, or missing FATCA or FBAR filings. No decision about what program to utilize should be made without consulting with experienced Los Angeles International Tax Attorneys & CPAs like us at the Tax Law Offices of David W. Klasing. On the one hand, the Streamlined Program can provide significantly reduced penalties compared to standard OVDP. However, only OVDP provides a nearly guaranteed insulation from criminal tax penalties should willfulness be at issue and the terms of the program are met. Taxpayers who mistakenly enter Streamlined when they intentionally or voluntarily avoided this duty may face criminal tax prosecution bolstered by the disclosures they just made. By contrast, a taxpayer who is not willful but enters standard OVDP will pay significantly more in offshore penalties than through the streamlined program.
How Do I Make a Voluntary Disclosure to the Department of Justice?
The updated policy stipulates self-disclosures related to internal revenue laws must be directed to the Department of Justice Tax Division. This might seem to depart from the traditional practice of disclosing to the IRS. However, it’s vital to understand that the IRS is not excluded from the process. Disclosures made to the IRS under its established practices are valid and acknowledged, providing a nearly guaranteed opportunity for taxpayers to return to tax compliance without facing criminal prosecution.
How Can a Business Secure Relief from California State Tax Mistakes?
If an out-of-state company has failed to satisfy all state tax obligations, the potential for fines, penalties, and other consequences is a real possibility. For business owners who may assume that their distance from California will prevent California from asserting Nexus, the California Franchise Tax Board and other state tax enforcement agencies will not hesitate to commence a tax enforcement action regardless of whether a company is located in California or across the country.
However, when tax mistakes have occurred, businesses and other taxpayers can avoid a worst-case tax scenario through the appropriate California Voluntary Disclosure Program. An array of taxpayers can qualify for the program, including legal entities, shareholders, and beneficiaries. For a qualified entity seeking entry for income or corporate tax problems, all the following criteria must be met to be eligible including:
- The entity is a corporation, S Corp, LLC, or trust;
- The entity has no previous filings with the California FTB;
- The trust does not have non-contingent California resident beneficiaries;
- The trust has never been administered in California;
- The trust has never been previously investigated or audited for tax obligation failures;
- The entity has come forward voluntarily and has not been the subject of inquiries from the FTB;
- The entity can make a complete and accurate disclosure describing all California taxable activity during the previous six years.
Businesses and other taxpayer entities that can establish these or alternate eligibility for the state voluntary disclosure program can avoid many fines and penalties that would otherwise be imposed. Similar requirements apply to voluntary disclosure relief from unfulfilled sales and use tax obligations administered and enforced by the California Department of Tax and Fee Administration (CDTFA) (formerly BOE).
What Civil Outcomes Should You Expect Once You Enter VDP
VDP does not operate as an “amnesty.” You should expect a negotiated civil resolution with meaningful penalties. IRS guidance on voluntary disclosures indicates that examiners generally consider asserting the civil fraud penalty under section 6663 for at least one year within the disclosure period, with other penalties applied as warranted. Offshore exposure can trigger FBAR consequences. The IRS describes willful FBAR penalties as potentially reaching the greater of $100,000 (as adjusted) or 50 percent of the account balance per violation year. For non-willful violations, the Supreme Court’s decision in Bittner materially constrained penalty computation by rejecting a per-account theory for non-willful penalties.
This is the practical point: VDP can protect your liberty, but it will still demand a disciplined civil settlement strategy to protect your net worth.
Our Dual-Licensed Los Angeles Voluntary Disclosure Attorneys and CPAs Can Help You Get Back into Tax Compliance
At the Tax Law Offices of David W. Klasing, our dual-licensed Los Angeles Voluntary Disclosure Attorneys and CPAs navigate the complexities of various federal and California state voluntary disclosures, including domestic, offshore, CDTFA, and FTB voluntary disclosures, streamlined procedures, and delinquent FBAR and international information return submission procedures. As long as a taxpayer who has willfully committed tax avoidance (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax non-compliance through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
Do Not Force a Non-Willful Case into VDP, and Do Not Gamble With Quiet Disclosure
If you acted non-willfully, you should not volunteer yourself into a criminal-resolution framework. The IRS Streamlined Filing Compliance Procedures remain a key pathway for taxpayers who can truthfully certify non-willful conduct, and the IRS continues to describe them as distinct from the VDP track. That said, streamlined submissions can still be audited under normal selection processes, and the IRS can verify submissions against information it receives from banks and other sources. The IRS also states that you cannot use streamlined procedures once it initiates a civil examination for any year.
You also should not attempt a “quiet disclosure” strategy as a substitute for a correct, privilege-protected plan. Quiet disclosures can serve as a roadmap for willfulness allegations when the IRS later compares amended filings with prior representations, third-party records, and digital evidence.
Call us today at (888) 637-7690, contact us online, or reach our Los Angeles office directly at (310) 492-5583 for your reduced-rate initial tax consultation.
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