The IRS is again allowing people with illegal, overseas bank and brokerage accounts to turn themselves in for reduced penalties. In 2009, the IRS did the same thing, giving taxpayers the opportunity to rat on themselves with the Voluntary Disclosure program. They said that 15,000 taxpayeres told on themselves in that round.

Having accounts overseas is perfectly legal. However, if you have one with more than $10,000 in it at any time during the year, you are required to report it to the IRS. Why? Because the IRS wants to tax you on the earnings in foreign accounts, and they want to know if you might be using foreign accounts to launder money or do other dirty financial deeds.

The U.S. Treasury requires taxpayers to file an FBAR (Foreign Bank and Financial Accounts Report), notifying the IRS that they have overseas accounts. This isn’t a tax return where you are reporting income. It is a separate form, alerting the IRS that you may have income.

Although it might seem silly, failure to file an FBAR could be expensive. (And with companies like UBS turning over records to the U.S. government, there’s a great chance that taxpayers could be caught.) Failure to report foreign income, even if in error or for a small amount, could result in a penalty of $10,000 per year. If the IRS thinks you’ve been “willfully evading” taxes with foreign accounts, the penalty can be $100,000 or half of the value of the account (whichever is greater) per year.

The current opportunity for taxpayers to self-report their violations runs through August 31, 2011, and slaps taxpayers with only a 25% penalty for the year with the highest overseas balance.  (That’s much better than the usual 50% penalty for each year.)

What should you do if you have overseas accounts that are unreported? Gather your documentation immediately and seek the advice of counsel. Do not approach the IRS without representation, and do not go to just any attorney. You must go to one who has significant experience dealing with the Internal Revenue Service, both in civic and criminal matters. The more they’ve worked with the IRS, the better they will be able to judge how serious your problems are, and provide you with the best solution.