More than 1,500 taxpayers have admitted to the Internal Revenue Service that they used the Son of Boss tax shelter, which the agency estimates cost the government more than $6 billion in the late 1990s and early 2000s.
The taxpayers came forward after the IRS offered in May to ease penalties slightly on users of the shelter who turned themselves in by June 21, the agency announced yesterday. They will have to pay taxes and interest, and they will have to pay a penalty of 10 or 20 percent unless they had previously disclosed to the IRS their participation in Son of Boss.
Internal Revenue Commissioner Mark W. Everson said the IRS will not know exactly how much money the settlements yield until it has gone over each case. (The $6 billion estimate comes from cases of which the IRS was already aware and does not include interest and penalties.) In many cases, taxpayers had transactions that produced write-offs of $10 million to $50 million, and several had "losses" of more than $500 million.
Son of Boss was aggressively marketed in the late 1990s and 2000 to companies and wealthy individuals, particularly those who had received a large, one-time surge in income, such as from the sale of a business.
The shelter involved the trading of options to create paper losses that were used to offset taxable income. It was a spinoff of an earlier shelter known as Boss (for bond and option sales strategy). In August 2000, the IRS declared Son of Boss abusive and began requiring promoters of it to maintain lists of investors.
Everson characterized the agency's May offer as a "pretty tough settlement package, in contrast to some of the things we've done in the past," and attributed its popularity to the agency's success in obtaining court orders forcing law and accounting firms to hand over lists of clients who used the shelter.
The response to the offer included about 85 percent of the taxpayers whose names the IRS had gleaned from those lists, and about 300 who were previously unknown to it.
Everson said the agency will now proceed against other taxpayers whose names it has and who did not take the settlement. It will issue deficiency notices to those people and will seek taxes, interest and penalties of up to 40 percent from them. The IRS will also continue to comb lists it has received from accounting firms such as KPMG LLP, Arthur Andersen LLP and BDO Seidman LLP; and law firms such as Chicago-based Sidley Austin Brown & Wood LLP and Jenkens & Gilchrist PC of Texas.
Those firms or their clients fought disclosure of the names, arguing that they were protected by attorney-client or some other privilege. Those arguments were rejected by courts.
Senate Finance Committee Chairman Charles E. Grassley (R-Iowa), in a written statement, said, "It'll be satisfying for law-abiding taxpayers to see Son of Boss participants ante up."