SKN | IRS Plans Lower Voluntary Disclosure Penalties for Crypto Tax Violations

Key Points:

• IRS Plans Program Overhaul: The agency aims to introduce revised voluntary disclosure procedures before December, with a target of resolving cases within 120 days after taxpayers complete the required submission process.
• Lower Penalties and Flexible Payments: Proposed changes reportedly include substantially reduced penalties and options such as installment plans and offers in compromise, although specific terms have not been announced.
• Separate Crypto Tax Legislation Advances: A proposed bill would establish a distinct process for correcting past digital asset tax violations, including certain unintentional reporting errors.

IRS Prepares Changes to Voluntary Tax Disclosure

The US Internal Revenue Service (IRS) is preparing to revise its voluntary disclosure program, with plans to reduce penalties and accelerate the resolution of tax violations, including cases involving cryptocurrency, according to an October 23 report by Forbes.

IRS Criminal Investigation Chief Jarod Koopman said the agency aims to introduce the revised program before December. The proposed timeline includes a target of resolving cases within 120 days after taxpayers complete the required submission process, a significant change from the existing process, which can take a year or longer.

The planned overhaul reflects an effort to make voluntary disclosure more efficient for taxpayers seeking to address past noncompliance while resolving outstanding liabilities.

However, the changes remain planned rather than finalized. The IRS has not announced specific penalty rates or provided a complete description of the revised procedures.

Crypto Tax Cases Would Follow Existing Disclosure Procedures

The revised program would not establish a separate disclosure process for digital assets. Instead, cryptocurrency-related tax violations would be handled through the same voluntary disclosure procedures used for other forms of tax noncompliance.

Koopman outlined the approach at the UCLA Extension Tax Controversy Conference, according to Forbes.

The distinction matters because the IRS’s existing voluntary disclosure program is primarily intended for taxpayers whose willful failure to comply with tax laws could expose them to criminal prosecution. It is not designed principally for individuals who made unintentional reporting errors.

Under the proposed changes, taxpayers who voluntarily disclose qualifying past violations could benefit from lower penalties and a more predictable resolution process. The IRS is also considering installment agreements and offers in compromise, which can allow eligible taxpayers to address outstanding liabilities through structured payments or negotiated settlements.

Koopman reportedly indicated that penalties under the revised program would be substantially lower than those currently imposed. However, without published figures or finalized eligibility requirements, the potential financial benefit for individual taxpayers remains uncertain.

Separate Legislation Targets Crypto Tax Corrections

Alongside the IRS’s planned overhaul, US lawmakers are considering a separate legislative approach focused specifically on cryptocurrency tax compliance.

Section 502 of the proposed Digital Asset Tax Certainty Act would establish a voluntary disclosure process for digital asset taxpayers seeking to correct past violations. Unlike the IRS’s existing program, which primarily addresses willful noncompliance, the proposed legislation includes provisions aimed at taxpayers who made unintentional reporting errors.

The bill cleared the House Ways and Means Committee in September. That committee action represents progress in the legislative process but does not mean the proposal has become law.

The two initiatives therefore address overlapping but distinct compliance needs. The IRS’s planned revision would update an existing program used for different types of tax violations, while the proposed legislation would establish a more specifically defined framework for digital asset tax corrections.

For taxpayers, the eventual scope of each program will depend on the final eligibility criteria, penalty provisions and implementation rules.

Implications for Digital Asset Tax Compliance

The potential changes come as cryptocurrency transactions create reporting obligations that some taxpayers may have misunderstood or failed to meet.

A more efficient disclosure process could give eligible taxpayers a clearer route to resolving past violations. Lower penalties and flexible payment arrangements could also make it easier for some individuals to settle liabilities without requiring immediate payment of the full amount.

Nevertheless, the proposed overhaul should not be interpreted as a general tax amnesty or an automatic reduction in penalties for every cryptocurrency reporting error. Eligibility will depend on the final rules and the circumstances of each case.

Taxpayers considering voluntary disclosure would need to distinguish between inadvertent mistakes and conduct that may qualify under the IRS’s program for willful noncompliance. The precise treatment of digital asset cases will become clearer once the agency publishes the revised framework.

Outlook

The key near-term developments are the IRS’s anticipated program announcement before December and further progress on the Digital Asset Tax Certainty Act. If implemented, shorter resolution targets, reduced penalties and flexible payment options could change how eligible taxpayers address past crypto tax violations. Until the IRS publishes the final terms and lawmakers advance the separate legislation, taxpayers should not assume that proposed relief is available or that the two initiatives offer identical protections.