Britain's Autocar and Autosport magazines quoted sources as saying the decision was taken at a board meeting in Wolfsburg, with an announcement expected on Wednesday.
Europe's biggest automaker is battling to recover from an emissions scandal that is set to cost it billions of dollars in compensation and vehicle refits.
"The priority is to advise our employees of the plans first," Autocar quoted a senior source as saying. "We will then make the decision to pull out of the WRC public. Until then, there will be nothing official."
Autocar reported that the board had pledged to retain the 200 Volkswagen Motorsport employees and could re-deploy them on other programmes that might include Skoda's rally efforts.
A spokesman for Volkswagen could not be immediately reached for a comment.
The world rally team has won the drivers' championship for the past four years with France's Sebastien Ogier.
Audi, also part of the Volkswagen group, announced last week that it was pulling out of the World Endurance Championship and Le Mans 24 Hours race to focus on the all-electric Formula E series.
Volkswagen last week reported profits at its core brand had plunged more than a half in the three months through September.
(Reporting by Alan Baldwin, editing by Toby Davis)
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