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

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Fernando Juarez

Fernando Juarez



Fernando is a member of the International Tax Practice at Freeman Law. He advises on complex U.S. and international tax planning. His tax practice focuses on cross-border transactions. Beyond planning, his experience includes voluntary disclosures, FBARs and international compliance.

Fernando’s expertise in tax planning extends to Fortune 500 companies, family offices, medium & small businesses, and individuals with foreign holdings. His primary areas of expertise include inbound structures for international investors, and outbound tax planning for U.S. based companies.

Fernando received his law degree from the Escuela Libre de Derecho in Mexico City and holds a Master’s in Laws from Stanford Law School, where he served as the first Hispanic Chair of the Stanford Tax Club.

Speaking engagements include presentations at the NAEA, the Texas Association of Enrolled Agents (TXSEA), the Tax Executives Institute in Houston, the Start Up Week in San Antonio, the Hispanic Chamber of Commerce in San Antonio, the International Section of the Dallas Bar Association, the Organization for the Economic Cooperation and Development (OECD) in Paris, France, and the International Tax Symposium organized by Freeman Law, among others.

Few 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…

The IRS CID has recently prioritized an effort to scrutinize so-called “Malta Pension Plans”. Under the Malta Pension Plan tax strategy, taxpayers sought to take advantage of certain language in the U.S.-Malta Tax Treaty. The general idea behind the tax strategy was that taxpayers could properly make tax-free contributions to a pension plan based under Malta law and grow these contributions free of taxes–that is, that taxpayers could make any type of contribution–for example, appreciated property. The tax strategy also provided that 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 tax benefits at issue (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, signaling its forthcoming challenges. 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 should not be interpreted to allow U.S. residents and their personal retirement plans to obtain the benefits provided for Malta-based pension plans.

Although this CAA is debatable, the IRS initiated large scale 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 information forms, including Form 3520 related to the disclosure of the interest in a foreign trust.

But more recently, in June 2023, the IRS drastically increased its efforts to tackle these arrangement and CID has rolled out a broad investigative effort.

Taxpayers under civil examination may be contacted by special agents of the IRS CID. Additionally, taxpayers may see the issuance of summons and potential in-person interviews with the IRS. Taxpayers and their counsel should, as always, evaluate their right to not self-incriminate under the Fifth Amendment and may assert such privilege, where applicable, during these interviews. Taxpayers should consult with their counsel regarding this and other issues.

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


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