The Cautionary Tale Of The Malta Pension Plan: First, Civil Audits, Now Criminal Investigations

ew things scare a taxpayer more than the IRS knocking on their door. But when the taxpayer realizes that the person knocking on the door is a Special Agent of the Criminal Investigation Division (“CID”) of the IRS, well…

For those taxpayers involved in “Malta Pension Plans,” this feeling is familiar or soon will be. Under the Malta Pension Plan, taxpayers sought to take advantage of certain language provided by the U.S.-Malta Tax Treaty. The general idea was that taxpayers could properly make tax-free contributions to a pension plan based under Malta law and grow these contributions free of taxes. This assumed that taxpayers could make any type of contribution–for example, appreciated property. Moreover, taxpayers could take lump-sum distributions, which were deemed to be tax free.

This interpretation was based on the language under article 17 of the U.S.-Malta Tax Treaty. Given the incredible tax benefits (no tax on contributions, and free tax distributions), numerous taxpayers entered into Malta Pension Plan arrangements.

The IRS has since issued guidance on the matter. First, the IRS included Malta Pension Plans within its annual list of the “Dirty Dozen” tax scams in 2021. The IRS went further and entered into a Competent Authority Agreement (CAA) with Malta at the end of 2021, in which it clarified that the intent of the language of the U.S.-Malta Tax Treaty was not to be interpreted to allow U.S. residents and their personal retirement schemes to obtain the benefits provided for Malta-based pension plans.
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Venar Ayar, IRS Audits
In our day-to-day lives, one usually has to try to find himself (or herself) on the wrong side of Law Enforcement.  That is of course, not counting basic traffic infringements (which are hardly considered criminal).  But in all other respects, it is mostly pretty easy to go about our day and not unwittingly become the target of a criminal investigation.

Unfortunately, that is not the case with the IRS. As if they weren’t terrifying enough when they were just wearing their “civilian” hats, they become infinitely worse when dealing with the IRS Criminal Investigation Division (CID).

From Regular Tax Audit to Criminal Investigation

Shockingly, it is very common for one to be completely unaware that they have become the target of a criminal investigation by the IRS until they come knocking, and catch you with your pants down.

In fact, oftentimes they can be tipped off by the civil agent who conducted your audit if he or she stumbles upon something they deem to be suspicious in nature. They can then alert the CID which in turn triggers the investigation.  In the meantime, however, they are under no obligation to inform you that they have set all this in motion (and probably won’t).  And what’s worse, at this point, they will likely even suspend their audit without even an explanation.  And you’ll be relieved, celebratory even, assuming that the audit is simply over.

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I received a panicked call from a client recently, being detained at a major metropolitan airport. The client, a nonresident United States taxpayer, owed money to the IRS. Upon investigation, I learned who was responsible for detaining him: none other than the IRS. Under what authority? A two-year-old program designed to target nonresident delinquent taxpayers who travel to and from the United States.

New York tax practitioners can soon expect to receive similar calls. Dubbed the “contact program,” it has a clear objective: to improve tax administration and compliance among nonresident U.S. taxpayers. In what ways?

(1) By collecting delinquent taxes; Read More