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.

Although this CAA is debatable, the IRS went ahead and began multiple civil examinations on taxpayers that were engaged in these types of arrangements. At the outset of the examinations, the IRS was focused on the civil side of the issue. For example, whether the income accrued in the Malta Pension Plan was properly reported in the U.S. or whether the respective informational returns had been filed. This included analysis of various international informational forms, mostly Form 3520 related to disclose the interest in a foreign trust.

But more recently, in June 2023, the IRS drastically increased its efforts to tackle these arrangements by halting the civil side of the examination and allowing the CI division of the IRS to take control of the investigation.

Taxpayers under civil examination are expected to be contacted by special agents of the CI division of the IRS. Additional actions will ensue, including the issuance of summons and potential in-person interviews with the IRS. For these taxpayers, counsel is advised to promptly respond to the IRS. Additionally, although taxpayers can cooperate with the IRS, taxpayers also have the right to not self-incriminate under the Fifth Amendment and can assert such privilege during these interviews.

For taxpayers who have not yet been contacted by the IRS, it is of the utmost importance to consult counsel to determine the proper steps to be taken in order to disclose their involvement in these arrangements and reduce any type of criminal exposure.

Finally, for taxpayers planning on engaging in these types of arrangements, counsel must also be considered to establish whether they actually can qualify for the benefits provided by the U.S.-Malta Tax Treaty.

The Malta Pension Plan tax story is far from its ending. Various results could be expected. The most favorable scenario is without a doubt, that the criminal investigation for a taxpayer is closed and that the civil examination is closed without adjustments. However, this result is unlikely, because there would need to be at least one adjustment (i.e., the income accrued from the Malta plan). Other unfavorable scenarios would require the payment of the penalties for not filing the appropriate informational returns on contributions made to the foreign trust (3520), the one-lump sum distributions (3520), plus other informational returns (Form 8938, etc.), and respective disclosures (treaty-based position forms). Less favorable results would include a referral to the Department of Justice for criminal prosecution.

In this age and time, where multiple arrangements are thriving in social media, such as infinite banking, use of trusts to “not pay taxes,” the abuse of the Employment Retention Credit (ERC) program, crypto losses, among others, taxpayers should be always aware of the implications of such arrangements, both from a tax perspective and in certain cases, also criminal. The Malta Pension Plan is a cautionary tale.

White Collar Defense Lawyers – Have a question? Contact FERNANDO JUAREZ, lawyer, Freeman Law, Texas.

Accused of tax evasion, wire fraud, conspiracy, or a RICO crime? Contact us as soon as possible to discuss your rights and the ways we can assist in your defense. We handle all types of cases, including complex international tax fraud allegations. Schedule a consultation or call (214) 984-3000 to discuss your allegations and investigations concerns.