The IRS is Targeting Tax-Free Distributions Under Maltese Pension Plans

In 2011, the U.S.-Malta Tax Treaty started a gold rush of sorts. The treaty’s language arguably (and unintentionally) allowed U.S. taxpayers to open personal retirement plans in Malta, contribute appreciated assets, and then systematically take structured distributions without incurring federal tax liability on the plan’s interest or principal. This led to many taxpayers opening Maltese pension plans—with some avoiding tens of millions of dollars in federal income tax liability.

IRS Seeks to Close Maltese Pension Plan Tax Loophole

Unsurprisingly, this did not sit well with the Internal Revenue Service (IRS). In 2021, the U.S. entered into a Competent Authority Agreement (CAA) with Malta that sought to close the treaty’s tax loophole. That same year, the IRS added “Maltese individual retirement arrangements misusing treaty” to its “Dirty Dozen” list, and earlier this year it issued proposed regulations that seek to make the use of Maltese pension plans for tax avoidance a “listed transaction.” These are transactions that the IRS has identified as vehicles for tax avoidance (and that trigger reporting requirements). The IRS is also actively targeting taxpayers who use Maltense pension plans for tax avoidance in IRS criminal tax audits and IRS tax Malta pension investigations.

Facing an IRS Criminal Tax Audit or IRS Tax Malta Pension Investigation

For taxpayers targeted in these audits and investigations, avoiding unnecessary consequences requires a strategic and proactive defense. Although some commentators have suggested that the IRS may be primarily focused on prosecuting promoters, the IRS routinely targets taxpayers who have unwittingly crossed the line from lawful tax avoidance to unlawful tax evasion. While unknowingly violating the law may not warrant criminal charges, convincing the IRS not to recommend criminal prosecution will still require the representation of an experienced IRS criminal tax attorney.

Additionally, even if criminal prosecution is unwarranted, civil penalties can still be on the table. If the IRS determines that a taxpayer has unintentionally underpaid his or her federal income tax liability on distributions from a Maltese personal retirement plan, the IRS can (and will) seek to impose civil liability for back taxes, interest and penalties. But, given the uncertainty surrounding the implications of the U.S.-Malta Tax Treaty prior to the CAA, even civil penalties may be unjustified—and taxpayers may be able to avoid unnecessary liability with experienced legal representation.

Responding to Inquiries from the IRS

Regardless of the circumstances at hand, U.S. taxpayers must be extremely careful when responding to inquiries from the IRS in relation to their Maltese pension plans. To avoid costly mistakes, taxpayers should rely on the advice and representation of an experienced IRS criminal tax attorney. If you have a Maltese pension plan and have been contacted by the IRS, we encourage you to contact us promptly for more information.

Speak with Washington D.C. Tax Attorney Kevin E. Thorn in Confidence

Are you facing IRS scrutiny related to a Maltese pension plan? If so, Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, can help. Call 202-349-4033 or contact us online to arrange a confidential consultation today.