The Wolves have been linked with Allofs ever since the departure of Felix Magath last month, who left his joint position as sporting director and head coach.
Reports in Germany say the 55-year-old former West Germany international, who has been sporting director at Bremen for 13 years, has signed a contract until 2016 with Wolfsburg.
"We have reached a good agreement with Werder," Wolfsburg board member Stefan Gruhsem told Kicker.
Wolfsburg are currently 16th in the Bundesliga, four points above the relegation places, and the club will be hoping Allofs can bring success back to the 2009 league champions.
During his time at Werder, Allofs oversaw a domestic league and cup double win in 2004 and victory in the DFB-Pokal in 2009, with defeat to Shakhtar Donetsk in the UEFA Cup final also in that year.