IRS probes wealthy in Malta tax scheme but they’re not the target

One morning in late June, criminal agents from the Internal Revenue Service made unannounced visits to dozens of wealthy Americans. They carried summonses and wanted to ask about pension plans in Malta on the IRS “Dirty Dozen” scams list.

But several tax lawyers said agents may have gone too far by looking for crimes in transactions that promoters promised were permissible under a 2011 US-Malta tax treaty.

“It is hard to see anything criminal in claiming tax benefits pursuant to a textual reading of the treaty, so it seems unlikely that most participants have any real criminal exposure,” said Tom Cullinan, a tax attorney at Chamberlain Hrdlicka in Atlanta.

Promoters had touted the plans as a savvy way to avoid millions of dollars in taxes after the two nations signed a treaty allowing them in 2011. But the IRS later viewed the plans as “too good to be true” and the nations changed the treaty in 2021.

With that, the magic of Malta pensions evaporated. The IRS began auditing plan participants. In early June, the agency proposed identifying certain Malta retirement transactions as “listed transactions,” subjecting them to greater reporting requirements and penalties.

IRS commissioner Daniel Werfel has made a crackdown on Malta plans a priority as the agency is committing fresh resources to pursue wealthy people. It’s also closed about 175 delinquent tax cases involving millionaires, generating $38 million in recoveries; stepped up work on wealthy non-filers; and focused on Americans seeking tax breaks in Puerto Rico. The IRS says it identified about 100 people who failed to meet the rules, and it expects “many of these cases to proceed to criminal investigation.”

SHOCK AND AWE

The shock-and-awe visits to Malta plan participants and promoters caught tax lawyers off guard. Within three days, a Beverly Hills tax firm warned of “what will doubtless be a massive and worldwide investigation.”

But weeks after the visits, a sense of calm has replaced the shock as lawyers now feel the Malta mayhem may lead, at most, to tax audits rather than criminal complaints. One lawyer said that plan participants can draw comfort from the nations needing to clarify their tax treaty.

“How do you turn that into a criminal case if there’s a misinterpretation?” said Joel Crouch, a partner at Meadows, Collier, Reed, Cousins, Crouch & Ungerman in Dallas.

An IRS spokesman declined to comment on the investigation.

The Malta pension plans differed sharply from qualified US pensions. They placed no limits on Americans putting in a wide range of assets, like securities or cryptocurrencies, without regard to their income. Those assets could appreciate without tax, and plan holders could start untaxed distributions at age 50.

For years, tax lawyers have written about scenarios showing just how lucrative a Malta plan could be. Attorney Hale Sheppard, who also works at Chamberlain Hrdlicka, cited a fictional Bob Smith, 50, who bought 10,000 crypto coins in 2010 for $1,000. After they grew in value to $100 million, Smith placed his crypto wallet in a Malta pension plan.

Under the rules, Smith could take a $30 million distribution at age 50 without taxes, then pull out more untaxed assets in three years. Other scenarios depicted taxpayers saving tens of millions of dollars in taxes in ways not permitted in US pension plans.

CLIENT LISTS

One summons, reviewed by Bloomberg News, sought a wide range of records such as a list of all clients, including their name, social security number, address and phone number; billing records, including client account cards; and all communications with clients and “any other party discussing Malta pension plans.”

Caroline Ciraolo, once the top tax prosecutor at the Justice Department, said she understood the IRS issued summonses after searching for references to Malta in international tax forms.

“This search would capture many taxpayers with interest in assets or entities in Malta, or Malta-sourced income, but no connection to a Malta pension plan,” said Ciraolo, a partner at Kostelantz LLP in Washington, in an email. Some taxpayers, after spending on lawyers, had the summonses rescinded, she said.

Some summonses sought information concerning unidentified clients in a manner similar to a so-called John Doe summons. The Justice Department has used them in offshore bank investigations after court approval. However, it doesn’t appear that the IRS got a court order before issuing these summonses, Ciraolo said.

Even attorney Steve Toscher, whose Beverly Hills firm sounded the early alarm, believes taxpayers have viable defenses and probably won’t end up as the focus of criminal prosecutions.

“It’s clear their focus is not on the taxpayer but the promoters or the enablers,” said Toscher, of Hochman Salkin Toscher Perez PC. “There’s no question that’s their primary focus.”