The Internal Revenue Service said Thursday it will let more than 4,000 taxpayers reduce tax penalties if they acknowledge using tax shelters that the agency deems abusive.

The offer gives the taxpayers until Jan. 23, 2006, to submit settlement papers with the IRS. The proposed deal covers 21 transactions, a wide spectrum of tax shelters that the IRS said were marketed to wealthy individuals, large corporations and small businesses.

Under the settlement, taxpayers would have to pay 100 percent of taxes owed and interest on unpaid taxes, along with either one-quarter or one-half of applicable penalties. The penalties could be reduce in cases when the taxpayer disclosed the shelter to the IRS or got advice from an independent tax adviser.

The IRS has identified more than 4,000 taxpayers who used the tax shelters, and the tax collectors say they continue to find additional users through shelter promoters and taxpayer audits.

"People entered into these deals often at the behest of lawyers and accountants peddling flaky tax products," said IRS Commissioner Mark Everson (search). "We're offering taxpayers a quick, quiet and cost-effective way to put these deals behind them."

The taxpayers would be permitted to recoup some of the fees paid to tax professionals.

This initiative follows previous settlement offers for two other tax shelters. The IRS said it collected more than $3.2 billion through settlements with taxpayers who used a shelter designed to hide unusual, one-time gains in income, such as the sale of a business.

The IRS also said dozens of executives and over 30 corporations agreed to participate in a settlement with executives who used a shelter designed to hide income from stock options.

The shelters flourished in the 1990s at a time when corporate ethics had eroded and the IRS had stepped back from its investigative functions and cut enforcement resources.