Having undeclared funds in offshore bank accounts is one of the easiest ways to ensure an IRS headache. As Jim Rome once educated daredevil Evel Knievel, "Evel, you can jump the Snake River, but you can't jump the IRS". So it is with those U.S. citizens and residents who have some money hidden away in a foreign account. The prevailing wisdom was that these foreign accounts were totally secure and undetectible. Well, all it took were a couple of Department of Justice supboena's and the Swiss banks started to turn over names and account numbers like they were passing free pretzels. No sooner than funds were withdrawn and re-deposited in other "secure" accounts additional subpoena's landed. Pretty soon, foreign banks form Luxemborg to the Isle of Man declared that they would restrict the number of new American account holders.
The question isn't a matter of "if" the IRS will find you, but "when". And rest assured, when the IRS does find you, you will get hammered...hard.
Just so you know, if you have a combined amount of $10K or more overseas, you must report these funds on a special IRS tax form called an "FBAR"--even if these funds produced no income. In short, the IRS wants to know there the money is, even if you aren't generating any income that would be subject to tax. Now normally. failing to file an informational IRS form is not the end of the world, but when come to FBARs they operate in a different universe. If you knowingly fail to file an FBAR, the penalty is up to 50% of the value of the account--each year! Obviously this adds up real fast, not including all the other interest and penalties and related failure to file penalties that would apply.
Just consider the following example provided by the IRS:
Assume that you had $1MM in an account since before 2003 that was not reported on FBARs for the following seven years. Let's also assume that this $1MM generated $50K in income each year for those years and was also not reported. If you don't come forward to the IRS and self-report, you would face up to $4,543,000 in tax, accuracy-related and FBAR penalties--ouch.
For those who have undeclared foreign accounts, there are wasy to "come-clean" without having to pay a 400% penalty. Unfortunately, the "soft-disclosure" method of just starting to file FBARs as if you had in the past isn't necessarily the best option.