Imagine owing up to $600,000 in penalties on, say, a $20,000 bank account simply because you didn't report it to the IRS.

It sounds unbelievable.

But such a gobsmacking penalty is possible if your account has been held overseas at a non-U.S. financial institution for years and you knowingly never disclosed it to the U.S. government.

You could be subject to lesser penalties if you voluntarily disclose the account or can prove you weren't being "willful" by not disclosing it.

But make no mistake: You will likely pay penalties, and -- if your foreign account generated income -- back taxes and interest as well.

Why?

For starters, the United States has a worldwide tax system, meaning every U.S. taxpayer must report all his income regardless of where it was earned.

Second, laws designed to discourage the wealthy from hiding money offshore are also going to snare a lot of other folks -- especially immigrants who are legal U.S. residents or citizens who may be sending money to family abroad, may have inherited money from a relative or simply have accounts left over from the days before they emigrated.

"Virtually everybody who came here from somewhere else has an account somewhere else," said Los Angeles-based tax lawyer Dennis Brager, who is a former IRS trial attorney.

Why bring this up now? Disclosure requirements aren't new, but starting this year the IRS will have enhanced capacity to enforce them, thanks to the Foreign Account Tax Compliance Act (FATCA).

Under FATCA, the U.S. Treasury has struck agreements with more than 100 countries that require those countries' financial institutions to report back to the IRS on any accounts held by U.S. taxpayers, which include U.S. citizens, people with green cards and U.S. ex-pats.

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If the IRS finds out about your account before you disclose it, your options for negotiating a lesser penalty will be greatly reduced, said Dallas-based tax lawyer Garrett Gregory, also a former IRS attorney.

How do I disclose the money? If you have foreign accounts in your name or simply have "signature authority" on them, and combined they're worth at least $10,000, you're supposed to electronically file what's known as an FBAR form by June 30 every year. You have to do it even if the accounts don't generate taxable income.

If your foreign accounts and assets combined are worth at least $50,000, you may have to disclose them on Form 8938 and file it with your federal tax return.

While there's some overlap in the assets that must be reported on each form, there are some notable differences.

How was I supposed to know that? Well, one way is if you fill out Schedule B for interests and dividends on your 1040. It has a section asking if you have any foreign accounts and directs you to read more about FBAR. Tax preparation software also asks whether you have foreign accounts.

A lot of folks in the soup on this say they checked "no" because their foreign account didn't earn any interest, or because the account was in their home country, so it wasn't foreign to them, Gregory said.

But checking "no" when the answer is "yes" makes it harder to prove you weren't being "willful," which carries a much bigger penalty.

Okay, so what are the penalties? There are a ton. Here's a sampling.

If the IRS finds that you willfully failed to disclose overseas accounts, you could owe a penalty of 50% of your total balance or $100,000, whichever is greater, for every year you failed to file an FBAR form. But that's capped at 6 years.

So if you didn't disclose foreign accounts totaling $20,000 -- or a $200,000 account -- for six or more years, you potentially could be fined $600,000. You may also be subject to criminal penalties.

If your failure is deemed non-willful, then the IRS can impose a penalty of $10,000 a year for every year you didn't disclose up to 6 years.

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A similar penalty could apply for failing to file Form 8938.

It gets worse. The IRS is interpreting the penalty to be per account, Brager said. So if you have four accounts totaling $20,000 that you didn't disclose for six years, that could mean a minimum penalty of $40,000 for each year of non disclosure, up to $240,000.

On the bright side, the IRS has some discretion to come down on these penalties.

There are so-called "mitigation guidelines" that the IRS may use for accounts under $250,000, especially in non-willful cases. So on a $20,000 account, Brager said the penalty might only be $500 per account per year, not to exceed $5,000 in total. On a $200,000 account, the penalty could be $5,000 a year.

It's unlikely, but they could even eliminate penalties altogether if you can show you're a true lamb lost in the woods -- e.g., you just learned of an account your childless Lithuanian great-aunt left you years ago. You will still have to pay back taxes and interest, however.

Whatever the end result, if you've hired an experienced tax lawyer -- which is advisable -- you'll also be out thousands of dollars in attorney fees.

What's the hit if I voluntarily come forward? Tough, but better.

Under the Offshore Voluntary Disclosure Program (OVDP), you would pay 27.5% of your highest combined balance over the past 8 years -- or 50% in some cases -- plus any unpaid taxes and interest penalties on your account for each of those 8 years. And you'll be filing 8 amended returns.

In return, however, you'll no longer be subject to criminal and civil penalties for willful non-disclosure, Gregory noted.

Another option is the Streamlined Disclosure Program, which only assesses a 5% penalty on the highest balance of your foreign accounts over the past 6 years. But the risk is that you still could be subject to willful non-disclosure penalties, Gregory said.

Update: In late May, the IRS issued guidance that effectively will lessen penalties on undisclosed foreign accounts. For instance, instead of potentially owing multiple times the amount of money you have abroad, the new guidance recommends that you be fined no more than 50% to 100% of your highest balance if you have multiple accounts. So, for example, in the case of a $200,000 account that was not disclosed for six years, instead of having to pay a $600,000 fine, you instead would be fined between $100,000 and $200,000.