A rebuilt IRS Voluntary Disclosure Practice is weeks away. IRS-CI published a proposal (IR-2025-124) on December 22, 2025, took comments through March 22, 2026, and on August 25, 2026, the head of IRS-CI said the final version, with a 120-day resolution target and upfront screening in place of a full examination, should arrive within about two months. As of September 12, 2026, nothing has been published, the IRS page warns that the proposal creates no rights for early applicants, and the December release set the effective date at six months after final publication.
For a New Mexican, that is half the problem. New Mexico’s income tax starts from federal adjusted gross income, so every dollar confessed to the IRS lands on a Santa Fe desk within months, and the state has no voluntary disclosure program, only a managed audit under NMSA 1978 § 7-1-11.1. The order of filing is where the money is saved or lost.
What does the IRS actually propose to change?
The current practice, described in IRM 9.5.11.9, runs through Form 14457: Part I asks for preclearance, Part II follows within 45 days with a narrative of the noncompliance, then six years of returns. The price is a civil fraud penalty of 75 percent of the understatement for the single highest year, plus a 50 percent willful FBAR penalty on the highest aggregate balance.
The proposal keeps the six-year window and the Form 14457 gateway, caps international information return penalties at $10,000 per return per year, and changes the penalty math. Amended returns would draw the 20 percent accuracy-related penalty under 26 U.S.C. § 6662 for each year. Delinquent returns would draw failure-to-file but not failure-to-pay penalties. FBAR violations would be penalized per year at an amount the IRS has not fixed; the August remarks put it in the 20 to 30 percent range, but nothing in writing confirms that. The August remarks also placed digital assets inside the general program. The National Taxpayer Advocate’s February 26, 2026 response flagged the catch: 20 percent on six years can cost more than 75 percent on one, and the three-month full-payment rule shuts out anyone who cannot write the check.
Why does a federal disclosure force a New Mexico decision?
Under NMSA 1978 § 7-2-2, base income is federal adjusted gross income with state modifications, so an amended Form 1040 that adds $90,000 adds $90,000 to the New Mexico return for that year, taxed at up to 5.9 percent. NMSA 1978 § 7-1-13 then requires a federal adjustments report within 180 days of the final determination date, and for an amended federal return that date is the day the amendment was filed. Miss it and the Taxation and Revenue Department gets a fresh three-year assessment window under § 7-1-18(E).
Under NMSA 1978 § 7-1-18 the state’s assessment limit is three years, six for a return that understates liability by more than 25 percent, seven for no return, and ten for fraud, so a five-year federal disclosure usually opens state years TRD could not otherwise reach.
Is a New Mexico managed audit the state’s version of voluntary disclosure?
Close, and the difference bites. The Multistate Tax Commission’s member list says it plainly: New Mexico has no voluntary disclosure program, only managed audits. Under § 7-1-11.1 the taxpayer signs an agreement with the Secretary, waives the limitation period for the covered years, and audits its own records by a deadline. NMSA 1978 § 7-1-69 imposes no penalty on tax that results from a managed audit, and NMSA 1978 § 7-1-67 waives interest if the audit is finished on time and the assessment is paid in full within 180 days of mailing.
The eligibility rules in TRD’s FYI-404 are the trap: no existing audit, no dispute with the Department over the same transactions, no criminal investigation for the periods at issue. Because the federal amended return triggers a reporting duty to TRD, filing federally first means racing the state’s data-matching against your own application. The safer sequence is a managed audit application through the Taxpayer Access Point before, or alongside, Part II.
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Who in New Mexico should be paying attention?
Four groups keep showing up: Los Alamos and Sandia scientists who arrived from abroad or retired to Santa Fe after careers overseas, with a foreign pension or account never reported on an FBAR; oil and gas royalty owners in Lea and Eddy Counties whose 1099-MISC income never reached a return; cash-heavy galleries, restaurants, and contractors in Albuquerque and Las Cruces; and crypto traders from 2021 and 2022, now that Form 1099-DA reporting is live. Cannabis is different: the federal practice excludes illegal-source income, and the IRS treats marijuana income that way even where the state has legalized it.
What does the math look like for a Santa Fe gallery owner?
Take a Canyon Road gallery, a single-member LLC, that took $450,000 of art sales in cash and wires from 2021 through 2025 and left them off Schedule C and its New Mexico gross receipts returns: $90,000 a year, with federal income and self-employment tax on the omitted profit of roughly $27,000 per year, $135,000 in all.
Under the current practice, the 75 percent fraud penalty lands on the highest year: $20,250. Under the proposal, 20 percent applies to every year: $27,000. For a domestic case the new regime costs slightly more, exactly the Taxpayer Advocate’s point; its gains are speed and no fraud finding on the record. Foreign account cases can flip: a per-year FBAR penalty near the inflation-adjusted non-willful figure (about $16,500 in 2025) totals roughly $100,000 over six years, against a $300,000 willful penalty on a $600,000 account.
Now the state. At Santa Fe’s combined gross receipts tax rate of about 8.2 percent, the gallery owes roughly $36,900 in GRT, plus New Mexico income tax of roughly $24,000 to $26,500 on the added base income. Outside a managed audit, § 7-1-69 adds a negligence penalty of 2 percent per month up to 20 percent, about $12,000, or 50 percent for intent to evade, about $31,000, plus daily interest. Inside a managed audit, finished on schedule and paid within 180 days, both lines read zero, a bigger swing than the federal old-versus-new difference.
| Feature | Federal VDP (current) | Federal VDP (proposed) | NM managed audit |
|---|---|---|---|
| Gateway | Form 14457 Parts I and II | Form 14457, electronic | Agreement via TAP |
| Years covered | Six | Six | As agreed; limitation waived |
| Income tax penalty | 75% fraud, highest year | 20% accuracy, each year | None; interest waived too |
| Foreign account penalty | 50% willful FBAR | Per-year amount, not yet set | Not applicable |
| Payment deadline | Full pay or installment plan | Full pay within three months | 180 days from assessment |
Should a New Mexican file the preclearance request now or wait?
It turns on whether the IRS already has your name. Timeliness under IRM 9.5.11.9 ends when the IRS opens an examination or investigation or receives third-party information; a 1099-DA, a whistleblower’s Form 211, or a foreign bank subpoena can each close the door without notice. With an offshore account or a live crypto trail, filing Part I now locks in timeliness; penalty terms follow whatever rules govern when Part II is accepted. For a domestic case with a small highest-year understatement, the single-year 75 percent structure may be the better deal.
What should not happen is a quiet amended return. It buys no criminal protection, and $90,000 of new Schedule C income in each of five years is the pattern classifiers exist to catch. On the state side it starts the 180-day clock under § 7-1-13 with none of a managed audit’s protection, and NMSA 1978 § 7-1-73 makes willfully subscribing a false return a second-degree felony once the tax exceeds $20,000.
What goes wrong when the two disclosures are not coordinated?
The recurring failure is a gap between the federal narrative and the state filings. Part II of Form 14457 states what was omitted; if it says cash sales went unreported, TRD’s GRT case is made, and gross receipts tax never appears on a federal return. A second failure is cash, because the federal three-month full-pay rule and the state’s 180-day rule land within weeks of each other. And the accountant’s point lawyers skip: an amended Schedule C changes self-employment tax, the qualified business income deduction, and current-year estimates, so the 2026 return has to match.
Frequently Asked Questions
Has the new IRS voluntary disclosure program been released yet?
Not as of September 12, 2026. IRS Criminal Investigation published proposed changes on December 22, 2025 and said on August 25, 2026 that the final version was about two months away. Until then the existing practice governs, and early applicants get no guarantee of the new terms.
Does New Mexico have a voluntary disclosure program for back taxes?
No. New Mexico offers a managed audit under NMSA 1978 § 7-1-11.1 instead. The taxpayer signs an agreement with the Taxation and Revenue Department, audits its own records, and owes no penalty or interest if it finishes on time and pays within 180 days.
If I amend my federal return, do I have to amend my New Mexico return?
Yes. NMSA 1978 § 7-1-13 requires a federal adjustments report within 180 days after the final determination date, which for a taxpayer-filed amendment is the day it was filed. New Mexico income tax starts from federal adjusted gross income, so the added income flows straight into the state return.
How far back can the New Mexico Taxation and Revenue Department assess tax?
Under NMSA 1978 § 7-1-18, the general limit is three years from the end of the calendar year the tax was due, six years when a return understates tax by more than 25 percent, seven years when no return was filed, and ten years for a fraudulent return filed with intent to evade.
Will the proposed IRS penalties be lower than the current 75 percent fraud penalty?
Not always. The proposal applies a 20 percent accuracy-related penalty to each of six years instead of 75 percent to the single highest year, so a steady multi-year omission can cost about the same or more. The real savings are in foreign account cases, where a per-year FBAR penalty replaces the 50 percent willful penalty.
Can a New Mexico cannabis business use the IRS voluntary disclosure practice?
Probably not. The IRS practice excludes income from illegal sources, and the IRS treats marijuana income as illegal under federal law even where the state has legalized it. The Taxpayer Advocate asked for a narrower exclusion; the proposal did not deliver one.
How North Star Law Firm Can Help
North Star Law Firm represents individuals and business owners correcting unreported income, unfiled returns, foreign accounts, or digital asset transactions with the IRS, and works with New Mexico-licensed counsel on the Taxation and Revenue Department side, including managed audit applications. Phillip Zagotti, JD/CPA, represents New Mexico taxpayers before the IRS and the U.S. Tax Court, and prices the federal and state exposure together before a Form 14457 is filed. The firm’s tax defense practice covers unfiled returns, penalty abatement, and gross receipts tax matters; an earlier post on 2026 FBAR penalty changes covers the foreign account side.
If you are holding years of unreported income and weighing whether to file now or wait, contact North Star Law Firm for a confidential review.