The Voluntary Disclosure Landscape: Strategic Considerations For Tax Lawyers – Comparing Canada And The United States

In the course of cross-border mergers and acquisitions, it is common for due diligence processes to uncover past tax reporting errors or unpaid taxes, which should be resolved either pre- or post-closing. US purchasers acquiring Canadian businesses, and vice versa, may discover that the target company has not remitted certain taxes as required under local law, creating exposure to liability and penalties. These issues can arise from a variety of factors, including misinterpretation of tax obligations, errors in past filings or evolving tax rules. As more taxpayers, particularly those with cross-border obligations, confront historical reporting gaps, it is critical to understand the voluntary disclosure frameworks administered by the Canada Revenue Agency (CRA) and the US Internal Revenue Service (IRS).

Voluntary disclosure programs offer a vital mechanism for taxpayers to correct past non-compliance while managing exposure to civil penalties and, potentially, criminal prosecution. For governments and taxpayers, these programs are both compliance tools and strategic levers that can preserve credibility, limit risk and provide a path to resolution under structured terms.

1. The CRA's Voluntary Disclosures Program under IC00-1R7

Effective October 1, 2025, the CRA overhauled its Voluntary Disclosures Program (VDP) through the issuance of Information Circular IC00-1R7  (IC00-1R7). This update reflects a policy shift intended to make the program more accessible, simplify procedural requirements and recalibrate relief in a manner that appears to be an attempt to increase the disclosures being made under the program.

Under IC00-1R7, a taxpayer may apply to the VDP to correct errors or omissions in a wide variety of tax obligations, including income tax, GST/HST and a number of other taxes administered by the CRA. Under Canada's program, a successful voluntary disclosure may be eligible for relief from penalties, interest and will not be referred for criminal prosecution. However, any taxes owing will still have to be paid in full by the taxpayer. 

One of the most significant changes introduced by IC00-1R7 is the move from the previous “General” and “Limited” program streams to a simpler two-tier structure: “unprompted” and “prompted” applications.

In an unprompted disclosure, the taxpayer comes forward without any prior communication from the CRA about a specific compliance issue, or where the only prior contact was an education letter or notice providing general guidance and/or filing information. These unprompted disclosures are typically eligible for general relief, which under the new policy means 100% of the applicable penalties are waived and 75% of the applicable interest may also be relieved.

In contrast, a prompted application is one made after the taxpayer has received verbal or written communication (excluding education letters) about an identified compliance issue related to the disclosure, or where the CRA has obtained third-party information about potential non-compliance. Relief is more limited for these applications, as they are normally only eligible for partial relief, which is 25% of the applicable interest and up to 100% of the applicable penalties.

Importantly, IC00-1R7 relaxes the traditional “voluntariness” test. Under the new rules, a VDP application is considered non-voluntary only where an audit or investigation has been initiated against the taxpayer or a related party in respect of the information being disclosed. This represents a meaningful expansion in eligibility, as the previous, more restrictive policies sometimes barred individuals who had been contacted by the CRA, for example, through information requests, demands or other direct contact regarding potential non-compliance.

In terms of process, applicants must submit Form RC199, Voluntary Disclosures Program Application, along with all of the information requested on that form. Required supporting documentation generally consists of the most recent six years of records for Canadian-sourced income or assets, and up to ten years for foreign-sourced income or assets. Once the CRA acknowledges the application, it establishes an effective date of disclosure, and if the application is accepted, relief is granted up to this date.

Despite the simplification, the new VDP is not a blanket amnesty. The CRA reserves discretion, as not every application will be accepted and each will be judged on its merits. Moreover, the ten-year statutory limitation period continues to apply, meaning that relief may not be available for tax liabilities or penalties arising more than ten years prior. In addition, Canadian tax legislation provides no right of objection for a decision made under the VDP.

From a strategic standpoint, tax lawyers continue to be important partners in the voluntary disclosure process in Canada. They are able to advise clients and assist them in the process while maintaining the benefits of solicitor-client privilege. Whether a disclosure counts as unprompted or prompted can materially change the relief available, thus it is essential to document all past letters, notices and third-party contacts. Engaging counsel early helps preserve privileged communications, ensure a consistent narrative and frame the disclosure in a way that maximizes leniency.

2. The IRS Voluntary Disclosure Practice

Taxpayers who are not in compliance US tax laws generally have two pathways for coming into compliance. First, taxpayers whose issues arise from mistakes, omissions, or lack of knowledge can pursue a quiet disclosure, typically by filing a missing original return or by amending a previously filed return to correct the issue. Second, taxpayers who believe they may have criminal exposure due to willful conduct should consider the IRS Voluntary Disclosure Practice (VDP), which is designed for willful noncompliance and potential criminal implications. Unlike the CRA programs, neither of the pathways for coming into compliance with the IRS guarantee full or partial penalty relief. 

While the general VDP has been available to taxpayers for quite some time, the IRS occasionally creates issue‑specific voluntary disclosure or settlement programs. These targeted programs are aimed at particular enforcement priorities and may offer reduced penalties or favorable resolution terms compared to the general VDP. Examples include the Offshore Voluntary Disclosure Program (2012) and the Employee Retention Credit (ERC) Voluntary Disclosure Program. Both of these programs offered reduced penalties for taxpayers whose applications were accepted. Taxpayers should consult counsel to determine whether a tailored program exists for their specific issue.

The IRS administers its general VDP through Criminal Investigation (CI). The VDP is geared toward willful noncompliance and potential criminal exposure. It offers a structured, but cumbersome, path for taxpayers to come forward, mitigate criminal risk and resolve liabilities. Taxpayers may apply to enter the program only if an IRS investigation into their noncompliance has not commenced. It is not an amnesty: civil penalties under the VDP are typically significant, and the process entails intensive fact development, extensive documentation and coordinated civil examination. If rejected from VDP, the IRS could still pursue maximum penalties and even jail time. The VDP has short deadlines, so taxpayers seeking to take advantage of the program must have all documents ready.

From a counsel's perspective, advising clients on an IRS voluntary disclosure requires careful planning. The willfulness threshold is high: only taxpayers whose non-compliance was knowledgeable, intentional or reckless generally qualify. Despite a high threshold, the IRS has broad authority to make assessments. So, while it may be difficult for the IRS to prove its penalties, the cost of challenging an assessed willfulness penalty can be tremendous. Lawyers advising clients who want to come into compliance must not only gather evidence and build a compelling narrative, but also coordinate cross-border issues (if relevant), prepare for a civil examination and negotiate the terms of a closing agreement. Entering the VDP does come with risks of civil and even criminal repercussions, particularly if the taxpayer is unable to provide the materials requested by the IRS. 

3. Cross-border implications and strategic coordination

Taxpayers subject to both CRA and IRS obligations, such as companies operating on both sides of the border or US citizens living in Canada, face complex, overlapping risks. For such clients, voluntary disclosure planning should be coordinated across both jurisdictions. Timing matters. Deciding which disclosure to file first, and how the narrative is presented, can affect eligibility, the type of relief available and the risk of triggering information exchange or enforcement.

Given increasing cross-border cooperation (e.g., information sharing under tax treaties, FATCA and CRS), disclosure in one jurisdiction often triggers follow-up in the other. Lawyers should therefore assess not only the technical eligibility for each VDP, but also the broader compliance strategy: whether to “lead with Canada” or “lead with the US,” how to manage privilege and waiver risk, and how to reconcile any overlapping or contradictory reporting.

4. Practical considerations with voluntary disclosures

Taxpayers should also be aware that neither the CRA's nor the IRS's programs are “get-out-of-jail-free” cards. Taxes owing must generally be paid, and the degree of relief available depends heavily on the taxing authority, when the disclosure is made, how candid the taxpayer is and how well counsel builds the case. For cross-border clients, the burden of coordinating disclosures, filings, and narratives, and confronting information exchange is high. Expert advice is therefore essential. 

When commencing a voluntary disclosure it is important to contact legal counsel at the outset. Where the voluntary disclosure deals with issues on both sides of the border, it is imperative to retain both US and Canadian counsel. Working with a firm like Dentons provides efficient access to experienced counsel on both sides of the border.

A well-constructed voluntary disclosure can yield substantial benefits not only in terms of penalty relief, but also in limiting enforcement risk, protecting against criminal referral and restoring a clean taxpayer record. But achieving that outcome demands thoughtful preparation, timely action and a collaborative strategy across legal and tax teams.

5. Appendix: Detailed comparison table — CRA VDP (IC00-1R7) vs. IRS VDP

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