The Internal Revenue Service has collected more than $3.2 billion in back taxes, interest and penalties from participants in a single abusive tax shelter, including $100 million from one taxpayer and $20 million each from 18 others, the agency said yesterday.
The total take for the agency from participants in the shelter is expected to top $3.5 billion, making this by far the largest such recovery ever, Internal Revenue Commissioner Mark W. Everson said. The collections resulted from an initiative in which the IRS offered to "close the book" and take no further action against taxpayers who came forward and paid all they owed, including penalties.
Commissioner Mark W. Everson says "some people have had to sell their villas or their yachts . . . to cover their debt."
(David Scull -- Bloomberg News)
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Everson said nearly 1,200 of the approximately 1,800 taxpayers -- mostly wealthy individuals but also a few corporations -- who made use of the shelter known as "Son of Boss" had agreed to the settlement. An additional 200 were barred from the program because they had also been involved in marketing the shelter.
"The IRS will vigorously pursue" the remaining 400 "who did not come forward. We have their names. We are going to give them special treatment, putting them at the head of the line for audits," Everson said, adding that the agency "will litigate the matter vigorously in court" if necessary.
The $3.2 billion is cash that the IRS has in hand, Everson said. Neither he nor other IRS officials would give names or discuss details of individual cases, but Everson did say that "some people have had to sell their villas or their yachts and come up with the cash to cover their debt to the government."
A few had to work out installment agreements with the agency, he said.
Everson and other IRS officials said dozens of investigations, both civil and criminal, are proceeding against promoters and some participants in Son of Boss. (Boss stands for bond option sales strategy.)
Tax laws are complex, and they contain many provisions that allow taxpayers to deduct or otherwise write off losses, legally sheltering taxable income. But tax shelters become abusive when provisions of the code are strung together in ways to create the appearance of deductible losses where no real losses have occurred -- as with Son of Boss -- or to shift gains to entities that are not required to pay taxes on them, such as a municipal subway system or a foreign bank.
When the IRS discovers such transactions, it may challenge them on audit or in court, and it also includes them on a list of transactions that must be reported to the agency by those who use or promote them.
In Son of Boss, the strategy involved buying and selling options so they canceled one another out but allowed the investors to claim a big loss in a partnership created for that purpose. The strategy was popular with taxpayers who had a large capital gain that they wished to shelter.
Hearings by the Senate Governmental Affairs permanent subcommittee on investigations two years ago showed Son of Boss and other complex shelters were underpinned by a vast network of accountants, lawyers, and commercial and investment banks -- including major accounting firms such as Ernst & Young International, KPMG International and PricewaterhouseCoopers International Ltd.
"The $3.2 billion collected by the IRS . . . shows how huge the tax shelter problem is and how much can be done when the IRS enforces the law," Sen. Carl M. Levin (D-Mich.), the subcommittee's ranking minority member, said in a statement yesterday.
States will also benefit, the IRS said. Nine, including Maryland and Virginia, have already collected more than $23.5 million as Son of Boss participants have filed amended state returns after settling their federal obligation, the IRS said.
The Son of Boss initiative is one of a series of steps the IRS has taken over the past several years to try to rein in the explosive growth in tax shelters that arose during the boom of the late 1990s.
