A Malta Retirement Scheme Civil Tax Audit: What To Expect

A Malta Retirement Scheme Civil Tax Audit: What To Expect

More Malta Pension Plan Civil Tax Audits are Coming

As many US taxpayers may be aware over the past several months, the Internal Revenue Service and Department of Justice have become laser-focused on the legality of the Malta Retirement Scheme. And, as you imagine, the US government takes the position that these types of retirement schemes are not kosher. A Malta retirement scheme is a type of retirement plan used primarily by non-employee members of the plan who contribute millions of dollars of assets and then seek to avoid tax on the gain by making distributions in certain installments — which are also designed to avoid tax based on the beneficiary’s age and the amount of the distribution. Essentially, it is being used as a Roth IRA, noting of course that the Roth IRA has contribution limits of around $7,000 or $8,000 whereas the Malta Retirement Scheme has taxpayers making multi-million-dollar contributions of money and assets. This has led to both civil and criminal tax audits and investigations. Let’s focus for a moment on pension plan tax audits that are civil in nature and the possible concerns for taxpayers who have invested in these types of retirement schemes.

Relied on a Tax Professional, Attorney, or Promoter?

One preliminary issue to keep in mind is that taxpayers who rely on a promoter, tax professional, or attorney are that they may have a basis for reasonable cause penalty waivers, depending on what they were sold on. This is especially true for US taxpayers who may have relied on a US attorney who promoted these types of tax planning alternatives as a safe method for retirement — and whether these professionals provided any sort of indemnity in case the plan was audited and ultimately rejected by the IRS.

Do You Owe Taxes?

When it comes to this type of audit, the core central issue for the IRS will be whether the taxpayer properly reported and paid income tax on the income they received. This will be a complicated scenario, especially in situations in which the IRS believes that the taxpayer substantially underpaid their tax based on the notion that the US person can sidestep U.S. taxes on the gain of assets that were contributed to the retirement scheme.

Capital Gain or Ordinary Income

In general, pensions such as 401K are taxed at a taxpayer’s ordinary income tax rate. Even if capital gains manifest within the fund, when that income is distributed to the taxpayer it is taxed at the OI tax rates. This is the give and take of being able to contribute pretax dollars to a 401K during the growth phase. With the Malta retirement schemes, one concern is that taxpayers have contributed assets that have realized but not recognized gains and the question will become whether the IRS will seek to tax the taxpayer at the ordinary income tax rates or the capital gain tax rates on assets that are long term.

Foreign Asset and Account Reporting

Since the Malta Retirement Scheme is a foreign pension plan – and specifically that it may be held in a country outside of Malta – makes the reporting and rules surrounding the annual reporting requirements very complicated. For example, since the Malta Retirement Scheme is a foreign account for reporting purposes the account will be reported on the FBAR and Form 8938. It is not uncommon for a Malta Retirement Scheme to contain mutual funds and other PFICs, which then brings up the issue of whether the funds are reportable as PFICs. Typically, there is an exception for PFICs held in retirement plans in a treaty country — and Malta is a treaty country. But, in order to take advantage of the Malta tax benefits, sometimes the administrators of the plan may be located in a separate country and while technically the investment is a Malta retirement scheme, the plan itself may be located in a country that does not have a tax treaty with the United States, which means that typically the PFICs do have to be reported separately and then there are other issues such as excess distributions, et cetera.

Being Proactive May Help

For taxpayers who have not yet been audited or received a notice from the Department of Justice or Internal Revenue Service, they may want to consider being proactive in submitting to one of the offshore disclosure programs such as the Streamline Procedures, Delinquency Procedures, IRS Voluntary Disclosure Program (VDP) — or possibly making a reasonable cause submission.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.