The tax man’s rap on Packeteer’s door was an unwelcome sound to investors.

On Friday, the developer of bandwidth management systems announced in a filling with the Securities Exchange Commission that the U.S. Internal Revenue Service is claiming the company owes additional income taxes, plus penalties, and interest, for the 2003 and 2004 tax years to the tune of approximately $122 million plus penalties of $49 million. On top of that, there will be interest.

Investors didn't hang around to find out what would happen next. The company's shares tumbled 18.3%, or $1.73, to $7.75 at midday. Volume was 5.4 million shares, about 10 times the daily average.

A company spokesman said the IRS is looking into transfer pricing matters between Packeteer and a subsidiary located in the balmy tax haven of the Cayman Islands.

Although Packeteer is historically a volatile stock, according to Kaufman Brothers analyst Manuel Recarey, there is a lot of uncertainty about how this will end for the company. Recarey noted that, “they have about 84 million in cash, and a $175 million claim the IRS says they owe, and if they do owe this, the question is how they are going to pay for it.”

In its filing the company said the IRS’ position is "inconsistent with applicable tax laws and existing Treasury regulations, as well as not supported by the facts.” The company saidit would fight the claims and not provide payments, if any, until the issue is resolved.

Story from Forbes.com : http://www.forbes.com/markets/2007/06/29/packeteer-stock-irs-markets-equity-cx_cg_0629markets24.html