Back in June, my 12-yr-old son inappropriately touched my 8-yr-old daughter. He has also been intimidating her and threatening her for a long time. I told his counselor, who was a mandatory reporter, and she had to report it. Chances are, whoever you tell will have to report it too - there are some factors they consider like whether he touched skin or clothing, his age (in my state the age is 12), their age differences, and whether he threatened them or coerced them in any way.
DHS has been involved and has come to our house for several visits. We have a safety plan that includes a door alarm on our son's door (we got ours at Home Depot and it was not expensive) and we put a lock on her door that she can lock and can be unlocked with a key. (We also had to show her how to break her window to get out in case of emergency.) We can never leave them alone in a room together, and if our son goes outside to play one of us has to be there to supervise.
Sometimes having DHS involved is a good thing, and sometimes not so much. While we were nervous at first because they were talking about sending him away, but they have backed off of that and it has since been OK. Our son is getting an evaluation at the Children's Hospital with people that specialize in sexual abuse, both victims and juvenile offenders. Our daughter is in counseling and is going to go the the family treatment center at children's so they can make sure she is OK.
If you know of a lawyer, I would call there tomorrow as well. It can be very confusing and the day I talked to a lawyer I got so many questions answered in just a half hour. They usually don't charge you for a consultation and may be able to help you through some of the confusion.
I agree with those who have said not to panic. Make sure they are separated tonight and talk to the psychiatrist tomorrow, who will probably have to report it. Try to have a safety plan in place before DHS calls and comes by. The girls need to know you'll do anything to protect them, and your son has to know that you love him and that you want to get him help, but that you have to take certain steps prevent it from happening again. It sounds like he is reaching out for help, and that's a good thing. My son won't even talk about it, and gets mad if anyone brings it up.
It's not going to be easy for you. These havd been the hardest few months of my life. I want to help both my children get through this with the best outcome. I want to prevent this from ever happening to my daughter again, and I want her to feel safe and secure, and I want to help my son not grow up to be a sexual predator and to be a happy adult. I still think it's possible, and that hope has helped keep me going.
Linda