(Reuters) -Executives of hedge fund Renaissance Technologies LLC could pay as much as $7 billion under an agreement with the Internal Revenue Service, a source familiar with the situation said, following a long-running dispute over the tax treatment of certain derivative transactions. The firm’s founder, James Simons, who stepped down as the firm’s chairman in January, will also make an additional settlement payment of $670 million, according to a letter obtained by Reuters which was sent to investors from Renaissance’s Chief Executive Peter Brown on Thursday. The news was earlier reported by the Wall Street Journal. Medallion, Renaissance’s flagship fund, is solely managed internally for friends and family. The letter, earlier published by the WSJ, said the fund had resolved its longstanding dispute with the IRS regarding the tax treatment of certain Medallion option transactions during 2005-15. The dispute was over whether investors should be taxed on portfolio gains at the higher short-term capital gain rates, rather than at the lower longer-term capital gain rates of the options themselves. “We engaged for several years in the IRS Appeals process,” the letter said, but concluded that it was better to agree to the resolution with the IRS “rather than risking a worse outcome, including harsher terms and penalties, that could result from litigation.” According to the letter, the seven individuals who were members of Renaissance’s board during those years, and their spouses, will be required to pay the tax and interest and penalties. Investors in the fund will be required to pay additional tax and interest but not penalties. The IRS did not immediately respond to Reuters’ request for comment. The payment would dwarf that of a transfer pricing dispute with GlaxoSmithKline in 2006 which saw the drug firm pay $3.4 billion. The IRS"s press statement here said at the time it was the largest single payment to the IRS to resolve a tax dispute. Elise Bean, a former longtime aide to former Sen. Carl Levin, who led the Senate investigation into the tax evasion, said “I wish Senator Levin were here, seven years after he first exposed its outrageous tax scam, to see RenTec finally held accountable.” “It’s good to see that, despite a years-long knock-down bare-knuckles battle, the IRS prevailed in compelling at least one set of billionaires to pay the taxes they owe,” Bean said. In 2015, the IRS issued guidance here that hedge funds using "basket options" had to report them on their tax returns and correct past returns, which came after a U.S. Senate subcommittee reported some funds were using this to avoid federal taxes. Levin, a Democrat who was then head of the powerful U.S. Senate Permanent Subcommittee on Investigations, had presented the findings of a year-long probe into basket options, calling for tougher action from the authorities. The report here said the largest user of the options, Renaissance Technologies Corp, saved an estimated $6.8 billion in taxes. Reporting by Manojna Maddipatla in Bengaluru, Maiya Keidan in Toronto, Paritosh Bansal and Megan Davies in New York and Pete Schroeder in DC; Editing by Amy Caren Daniel and Chris Reese Our Standards: The Thomson Reuters Trust Principles.