June 4, 2004 -- During the boom of the late 1990s, thousands of high net-worth individuals used what is known as the "Son of BOSS" tax shelter. Those people now have less than three weeks to reach a settlement with the Internal Revenue Service.
The scheme was particularly popular with entrepreneurs because it could be used to cancel out income from the sale of a business. The shelter created losses to offset taxable income that came from large one-time gains by using a partnership stake and short sales of options, according to an IRS description.
The IRS considers the losses generated by the shelter to be artificial, meaning their sole intention was to eliminate taxes. It is a variant of a shelter known as "bond option sale strategy" that the government also went after.
The IRS estimates that the tax shelter resulted in an income understatement of more than $6 billion. The agency wants that money, plus interest, in addition to a stiff penalty for those who didn't divulge their participation in the shelter in 2002.
The strategy was promoted by lawyers, accountants and investment banks until the IRS declared it abusive in August 2000. While it is unclear exactly how many used the shelter, the IRS says it has already identified several thousands.
The IRS offered the settlement on May 5 and has given violators until June 21 to come forward. The penalties range from 10 percent for first-time tax shelter users who didn't take advantage of an IRS offer to come forward in 2002 to 20 percent for serial abusers.
The IRS will, however, allow those who come forward to deduct out of pocket costs, such as promoter and professional fees, as a loss. Those who did inform the IRS of their use of the shelter in 2002 won't face a penalty.
Participants who do not accept the settlement offer will receive a statutory notice of deficiency disallowing all losses and will be assessed the maximum penalty. They can then take the IRS to court.