The nation's tax collectors have identified 42 corporations with executives who wrongly sheltered more than $700 million from taxation and suspect there could be considerably more.

"This involved many leading companies - household names - and some of their senior executives," said IRS Commissioner Mark Everson. "There are basic governance issues here."

Executives who step forward by May 23 to report their involvement in the shelter and participate in the settlement must pay a 10 percent penalty, half the 20 percent penalty that could be applied.

Companies who participate face no penalties, but they must disclose the names of all executives who participated. The IRS intends to contact the senior management of corporations known to have used the shelter and recommend that the matter be reviewed by the board of directs' audit committee.

In the typical shelter, a corporation grants an executive stock options. The executive transfers the options to a family partnership established solely for receiving the options, usually owned by the executive, spouse and children.

The executive takes a 15 to 30 year promissory note as payment for the options. The partnership sells the options and takes the position that taxes aren't due for 15 to 30 years.

Tax laws say that executives owe tax when they exercise stock options. Corporations can take a deduction for the compensation at that time. In about half the known cases, the company deferred its deduction due to the executive's tax sheltering arrangement.

Everson said the delayed deductions and the role of financial advisers, who recommended the shelters and served as company auditors, raise questions about corporate governance. In some cases, company employees overrode payroll systems to avoid reporting the income on executives' W-2 wage and tax statements.

"These deals were done for the benefit of executives and often at the expense of shareholders and they involved ... many leading publicly traded companies," he said.

Executives who do not participate face paying the 20 percent penalty. Corporations face paying penalties and losing deductions for underreporting income, failing to pay employment and income taxes and issuing incorrect W-2 statements.

A trace of the transactions can be found in records filed with the Securities and Exchange Commission to report the transfer and exercise of stock options, IRS Senior Adviser John Klotsche said. "We will be reviewing those records," he said.

The tax shelter was marketed during the late 1990s and early 2000s.

-- Mary Dalrymple