Federal banking and tax law requires people to disclose foreign accounts they own or have signature authority over. Because United States citizens and residents are taxed on worldwide income they must also report the income derived from these accounts. For various reasons, many people have not provided the necessary account information and have not reported the income.

The IRS recently announced its third program whereby people can voluntarily report previously undisclosed foreign account information and pay tax on foreign account income. I suspect the IRS is hoping the level of participation will turn into a stampede based on its success with the two previous programs and the increased reporting of account/asset information by foreign financial institutions. Over $4.4 billion has already been collected under the previous programs.

Under the new program, a penalty as high as 27.5% of the highest aggregate foreign account/asset value during the eight full tax years prior to disclosure may be assessed. In limited situations the penalty may be as low as 12.5% or 5%.  In addition, participants will be required to file or amend tax returns for up to eight years and pay income tax, interest and certain tax penalties related to the previously unreported income.

Why would anyone want to voluntarily participate in a program with penalties and costs so severe? Well the short answer is if you are caught the result may be substantial fines and free housing in a federal prison for up to 10 years because you may be charged criminally. Also, the statutory penalty can quickly exceed 100% of the aggregate foreign account/asset value consuming domestic assets as well, and you are still liable for taxes, interest and tax related penalties. In this context the program looks like a good deal.

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