The IRS says it is weeks away from replacing its Voluntary Disclosure Practice with a faster and cheaper version. For an Ontario restaurant owner with years of unreported cash, or a Rancho Cucamonga engineer with an unreported account in Hyderabad, that sounds like the moment to act. But the federal program is only half the problem in California. The other half is the Franchise Tax Board, the CDTFA, and the EDD, which IRS Criminal Investigation cannot bind.
What is the IRS changing in its Voluntary Disclosure Practice?
The Voluntary Disclosure Practice is IRS Criminal Investigation’s bargain: come forward before the government finds you, file corrected returns, pay, and CI will not recommend prosecution. The process runs through Form 14457: Part I is a preclearance request, and Part II, due within 45 days of the preclearance letter, tells the full story.
The civil price has been steep: six years of returns, a 75 percent civil fraud penalty under 26 U.S.C. § 6663 on the worst year, and, for foreign accounts, a willful FBAR penalty under 31 U.S.C. § 5321(a)(5) of 50 percent of the highest aggregate balance. The National Taxpayer Advocate counted only 161 closed cases in six years.
On December 22, 2025, in IR-2025-124, the IRS proposed a redesign that keeps the six-year lookback but replaces the fraud penalty with a 20 percent accuracy-related penalty on each amended year, charges only failure-to-file penalties on delinquent returns, caps international information return penalties at $10,000 per return per year, and computes FBAR penalties per year. Approved taxpayers would have three months to file, pay, and sign.
Has the new program been released, and should a Californian wait for it?
Not as of September 12, 2026. CI Chief Jarod Koopman said in late August that the revised program would be public within roughly 60 days, with a 120-day resolution target, upfront screening instead of full examinations, and digital assets folded in. Practitioners at the same conference reported the willful FBAR penalty dropping into the 20 to 30 percent range. Treat that as a preview; nothing is final yet.
A disclosure is timely only if it arrives before the IRS opens an examination, receives a third-party tip, or obtains the taxpayer’s information from an enforcement action. A foreign bank’s FATCA report can close that window any day. The practical move is to file Part I now, which preserves eligibility, and time Part II so the case closes under the better framework.
Unreported Income or Foreign Accounts? The first response usually frames everything that follows. Talk it through with an attorney and CPA before you act.
Does California have its own voluntary disclosure program?
The FTB does, but it is narrower than most people assume. Under Rev. & Tax. Code § 19191, the Franchise Tax Board may sign a voluntary disclosure agreement with a “qualified entity” and its nonresident owners and trust beneficiaries. The definitions in § 19192 exclude any entity organized in California, registered with the Secretary of State, or staffing a permanent facility here, and require that the applicant has never filed or been contacted by the FTB. It fits a Nevada corporation that has sold into Sacramento for years without filing, not a Corona sole proprietor who left cash off every return.
Where it applies, the terms are a six-year lookback, waiver of anything older, and waiver of late-filing, late-payment, and estimated tax penalties, applied for anonymously on Form FTB 4925, with the FTB required by § 19191(b)(5) to act within 120 days.
What happens to a California resident who amends six years of returns?
A resident individual has no state disclosure program, so the state side is amended Forms 540, full payment, and a penalty fight over what the FTB asserts. The accuracy-related penalty under Rev. & Tax. Code § 19164 conforms to federal § 6662 at 20 percent, and subdivision (d) conforms to the 75 percent fraud penalty. Sections 19131 and 19132 add up to 25 percent each for late filing and late payment.
Under § 19058 the FTB has six years, not four, when more than 25 percent of gross income was omitted, and under § 19087 there is no limit if no return or a fraudulent return was filed. The FTB has its own Criminal Investigation Bureau, § 19706 makes a willful false return punishable by jail or prison, and a federal closing agreement does not bind that bureau.
If the receipts were taxable sales, the CDTFA is owed sales tax on the same dollars, and its disclosure provisions in Rev. & Tax. Code §§ 6487.05 and 6487.06 (a three-year lookback for unregistered out-of-state retailers and use tax purchasers) do nothing for a permitted retailer that underreported deliberately. That retailer amends and faces a 10 percent negligence or 25 percent fraud penalty. The EDD has no statutory disclosure program at all; an employer that paid cash wages registers, files the missing DE 9 and DE 9C returns, pays, and asks for good-cause relief from penalties such as the 15 percent late-payment penalty in Unemp. Ins. Code § 1112.
How does a federal closing agreement trigger a California reporting duty?
Rev. & Tax. Code § 18622 requires a taxpayer whose federal return is “changed or corrected by the Commissioner of Internal Revenue” to report the change to the FTB within six months of the final federal determination, and subdivision (b) imposes the same six-month duty on anyone who files an amended federal return that increases California tax. Each amended Form 1040 starts its own clock, so file the state returns alongside them.
California also departs from federal rules for licensed cannabis operators: Rev. & Tax. Code § 17209 switches off 26 U.S.C. § 280E for state purposes through 2029, so the state amended returns can claim deductions the federal returns cannot. Because the federal program excludes illegal-source income, a cannabis disclosure also raises a threshold question counsel must resolve before any preclearance request goes out.
What would a Chino restaurant owner with $1.1 million unreported actually owe?
Take a Chino couple who own a sit-down restaurant and skimmed $1.1 million of cash across the 2020 through 2025 tax years, roughly $183,000 a year, with the largest year at $250,000. Assume a 32 percent federal rate and a 9.3 percent California rate.
Federal tax on the omitted income is about $352,000. Under the existing framework the fraud penalty hits only the worst year: 75 percent of that year’s $80,000 tax, or $60,000. Under the proposal it is 20 percent of each year’s understatement, about $70,400. California adds roughly $102,000 of tax, plus about $20,500 at the 20 percent rate or about $76,700 if the FTB asserts fraud. Sales tax on those meals at Chino’s 7.75 percent combined rate adds about $85,000 before penalty, and if skimmed cash paid kitchen staff off the books, the EDD assessment follows. Interest runs on each layer.
| Layer | Existing IRS framework | Proposed IRS framework | California treatment |
|---|---|---|---|
| Income tax on $1.1 million | About $352,000 | About $352,000 | About $102,000 (FTB) |
| Civil penalty | 75% of worst year, about $60,000 | 20% every year, about $70,400 | 20% to 75%, FTB discretion |
| Lookback | Six years | Six years | Six years if 25% omitted; unlimited if fraud |
| Deadline to file and pay | Set by examiner | Three months from approval | Six months after each federal change |
| Sales tax on receipts | Not addressed | Not addressed | About $85,000 plus CDTFA penalty |
The numbers flip if the same $1.1 million sat in a foreign account. There, the current 50 percent willful FBAR penalty alone is $550,000, and the August preview alone could cut that by hundreds of thousands of dollars. Roseville tech workers with accounts abroad and Chinese-American and Indian-American families in the Inland Empire collecting rent on property overseas have the strongest reason to preserve eligibility now and close under the new rules. Where the failure was careless rather than deliberate, Bittner v. United States, 598 U.S. 85 (2023), which capped the non-willful FBAR penalty at $10,000 per report, points toward the streamlined procedures instead.
Frequently Asked Questions
Can a California resident use the FTB Voluntary Disclosure Program?
Generally no. Rev. & Tax. Code § 19192 limits it to entities not organized, registered, or staffed in California that have never filed or been contacted by the FTB, plus their nonresident owners. A resident individual files amended Forms 540 and pays tax, interest, and any penalty the FTB asserts.
Does an IRS voluntary disclosure protect me from the Franchise Tax Board?
No. IRS Criminal Investigation’s promise not to recommend prosecution binds only the federal government. The FTB, CDTFA, and EDD each decide separately whether to assess penalties or refer a case, so state filings belong alongside the federal disclosure.
How long do I have to tell California about amended federal returns?
Six months. Rev. & Tax. Code § 18622 requires anyone who files an amended federal return that increases California tax, or whose return the IRS adjusts, to report the change to the FTB within six months. Missing it keeps the FTB’s assessment period open on those items.
Should I file my IRS preclearance request now or wait for the new program?
For most taxpayers, file Part I of Form 14457 now. Eligibility ends the moment the IRS opens an exam, gets a tip, or receives third-party data about you, and the redesign will not revive it. Preclearance holds your place while counsel times Part II.
Will the new IRS program lower penalties for a cash business with no foreign accounts?
Not necessarily. The proposal swaps a 75 percent fraud penalty on the single worst year for a 20 percent penalty on every year in the six-year window, which for steady domestic omissions can add up to more. The savings are largest for FBAR and international information return cases.
Does a licensed California cannabis business face the same tax on unreported income as a restaurant?
Federally it is worse, because 26 U.S.C. § 280E denies most deductions. Rev. & Tax. Code § 17209 turns off § 280E for California licensees through 2029, so state amended returns can claim ordinary expenses. The federal program’s exclusion of illegal-source income must also be analyzed before a cannabis operator applies.
How North Star Law Firm Can Help
North Star Law Firm represents Inland Empire, Sacramento, and other California individuals and businesses who need to correct unfiled returns, unreported income, or undisclosed foreign accounts before the government finds them first. Phillip Zagotti is a California attorney and a CPA, which matters here because the choice between the criminal Voluntary Disclosure Practice, the streamlined procedures, and a plain amended return turns on both the legal exposure and the numbers. The firm prepares the federal and California submissions together and handles the follow-on tax defense, penalty abatement, and unfiled return work with the FTB, CDTFA, and EDD.
If you are deciding whether to come forward now or wait for the redesigned program, the eligibility clock comes first. Contact North Star Law Firm or schedule a consultation to review your exposure under both frameworks.