This morning, I woke up to news in the Wall Street Journal that indicated that the United States and the Republic of Malta had entered into a Competent Authority Agreement (“CAA”). Generally, this news would not have caught my eye—but, as a tax professional, I was well aware of certain tax promoters who had tried to sell so-called “Malta pension plans” to higher-income earners under the guise that it was a vehicle to defer or eliminate federal income taxes.
Based on the CAA itself, the United States and Malta have agreed that, for purposes of the United States-Malta income tax treaty, the term “pension fund” does not include funds: (1) allowed to accept contributions from a participant in a form other than cash; or (2) do not limit contributions by reference to earned income from personal services (including self-employment) of the participant or the participant’s spouse. According to the CAA, this includes funds, schemes, or arrangements from a personal retirement scheme established in Malta under its Retirement Pensions Act of 2011.
Given this clarification, many may ask what is next? That discussion follows.
Background of the Malta Pension Plan Scheme
Some U.S. citizens and residents are relying on an interpretation in the U.S.-Malta Income Tax Treaty to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily, gain would be recognized upon disposition of the plan’s assets and distributions of the proceeds. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment.
Unlike some other often repeating annual themes (such as offer-in-compromise mills), the Malta pension plan arrived on the Dirty Dozen list fairly quickly for the first time in 2021. It is likely that the IRS picked up on the scheme from either information received under its Voluntary Disclosure Program (VDP), from IRS whistleblowers, or from everyday examinations.
What Happens Now?
Because these pension plans are on the IRS’s radar, it is likely the IRS will focus on this area for some time. This may include the issuance of summons to banks or financial institutions that hold the foreign assets of the pension plan or the careful review of former disclosures under the VDP, which may have already communicated information to the IRS regarding promoters who were involved in selling these schemes to other taxpayers. Generally, after the IRS reviews the information that it receives and already has, it begins to contact taxpayers through the use of exams or criminal investigations.
What Can You Do?
The News Release issued by the IRS on December 21, 2021, specifically notes “that the IRS is actively examining taxpayers who have set up these arrangements . . . [and] recommends taxpayers who have participated in a Maltese personal retirement scheme [to] consult an independent tax advisor prior to filing their 2021 tax returns.” The IRS also advises taxpayers that they should “take appropriate corrective actions on prior filings.”
The takeaway from the IRS’s seemingly direct message: taxpayers should attempt to become compliant prior to receiving notification from the IRS. There are many ways taxpayers in these situations may become compliant—and no particular way fits all circumstances. For example, if the taxpayer only participated in the Maltese pension plan this year and has not filed a tax return, the taxpayer may be able to utilize the rescission doctrine and also properly report the transactions on international information returns and/or FBARs for 2021. If the taxpayer has participated in the Maltese pension plan in years prior to 2021, the taxpayer may consider filing a disclosure under the VDP or the Streamlined Filing Compliance Procedures—depending, of course, on whether the conduct was willful or not. Careful consideration of each option should be weighed prior to making a final determination.
Taxpayers need to be careful when third parties communicate what seems to be a “too-good-to-be-true” scheme to defer or eliminate federal income taxes. In many cases, taxpayers can avoid the headaches by having a tax professional review the purported plan and by requesting the tax professional issue a tax opinion on the matter. Although there may be some upfront costs involved, the taxpayer can rest easier knowing that a competent tax professional has vetted all of the issues (which may, in turn, avoid a lot of back costs in the end).
And for those taxpayers who engaged in the Maltese pension plan scheme, not all is lost. By acting quickly, such taxpayers may be able to enter into certain IRS amnesty programs that can potentially alleviate civil penalties and criminal exposure. But, the key here is to act quickly as many of the IRS’s programs require you enter into them prior to the IRS receiving specific information about you from another source.
For more on these IRS programs, see below:
And for what can go wrong when these IRS programs are not properly followed, see below:
- Yet Another Streamlined Filing Turns into a Criminal Indictment, Implicating Former CPA and Businessman
- The Rahman Case is a Cautionary Tale of What Can Go Wrong Under the IRS Streamlined Filing Compliance Procedures
- The Danger of a Quiet Disclosure
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