Overview of Malta Pension Plan Tax Enforcement by IRS

The IRS Investigates Malta Pension Plans for Non-Compliance

Malta Pension Plans are Being Targeted for IRS Non-Compliance

Back in 2021, the United States and Malta issued a CAA (Competent Authority Arrangement) acknowledging that U.S. Taxpayers’ attempts to utilize certain Malta personal pension and retirement schemes as Roth IRA alternatives were not kosher. In other words, a person cannot just unload gobbles of cash and assets into a non-employment personal pension in Malta and then turn around and avoid US taxation on much of the distributions along with non-recognized capital gain on the assets’ increased value at the time of distribution.

But, what happens next?

In 2023 and 2024, the U.S. Government pursued many U.S. taxpayers who they believed misinterpreted the US/Malta tax treaty — and in some cases even went so far as initiating both civil and criminal tax investigations. As with most things involving the Internal Revenue Service and international tax, Malta pension plan participants may want to consider getting into offshore tax compliance on their own – before they are investigated by the IRS. 

*Golding & Golding previously published the Malta Pension Plan Tax Enforcement article back in 2021 and has since updated and expanded it to also include compliance options.

First, Why The IRS Dislikes Malta Retirement Schemes

The first thing to keep in mind about Malta Pension Plans is that the Internal Revenue Service is not referring to a person who works in Malta and accumulates an employment-type pension plan, similar to a U.S. 401K. Instead, the IRS is talking about Maltese Retirement Schemes — which are primarily formed by wealthy taxpayers who never worked in Malta. These taxpayers invest post-tax dollars and assets with unrealized gains into a Malta Retirement Scheme using after-tax dollars and other assets that have unrealized gains, which then grow exponentially. And when it comes time for distribution, the taxpayer seeks to circumvent paying taxes similar to how taxes (similar to a Roth IRA). The difference is that a Roth IRA has a very small maximum contribution amount and does not apply to high-income earners. Taxpayers investing in Malta Retirement Schemes are doing so with the idea that there is no cap, which was not the intent of the IRS when the United States and Malta entered into a tax treaty.

New Malta CAA, Summonses, and Audits

A few years back, the IRS issued a Malta Competent Authority Arrangement explaining that it was closing any purported loophole that taxpayers had relied on to invest tax-free in these Malta Retirement Schemes. After releasing the CAA, it was pretty much all quiet on the Western front until 2023, when the IRS and Department of Justice came together to pursue civil and criminal tax audits and investigations. Thus, it is clear that the U.S. government has every intention of going after wealthy taxpayers who generated significant income by investing in a Malta Retirement Scheme. However, it has yet to be seen whether there will be any criminal convictions for investing in a Malta Retirement Scheme. Nevertheless, it is clearly on the IRS’s radar and something that taxpayers who have invested in these types of schemes need to be aware of.

Malta CAA

• • • WASHINGTON — The competent authorities of the United States and Malta signed a competent authority arrangement (CAA) confirming their understanding of the meaning of pension fund for purposes of the United States–Malta income tax treaty (Treaty). The competent authorities have entered into this agreement after becoming aware that U.S. taxpayers with no connection to Malta were misconstruing the pension provisions of the Treaty to avoid income tax on the earnings of, and distributions from, personal retirement schemes established in Malta.

  • • The CAA confirms the U.S. and Malta competent authorities’ understanding that (except in the case of a qualified rollover from a pension fund in the same country) a fund, scheme or arrangement is not operated principally to provide pension or retirement benefits if it allows participants to contribute property other than cash, or does not limit contributions by reference to income earned from employment and self-employment activities. Because Maltese personal retirement schemes contain these features, they are not properly treated as a pension fund for Treaty purposes and distributions from these schemes are not pensions or other similar remuneration.

Potential Malta IRS Reporting Penalties (FBAR, FATCA, and More)

When a taxpayer has ownership or an interest in foreign accounts, assets, or investments, there are various international information reporting forms that the taxpayers are required to file. Failure to file these forms may result in significant fines and penalties. Unfortunately, there is an abundance of incorrect information and inaccurate explanations online about how the taxpayer may potentially get hit with an international penalty as a result of non-compliance with a Malta Retirement Scheme.

Let’s take an example of how may play out in the real world.

Malta Retirement Scheme Example: Meet Michelle

Example: Michelle is a U.S. citizen who has a significant amount of wealth. She invests $4 million into a Malta Retirement Scheme, which is primarily invested in high-yield dividend funds and some balanced growth funds. There are no contributions from any employer and the fund would not enjoy any tax-exempt status or status as a tax-favored foreign retirement trust.

FBAR Penalties

Foreign retirement plans are required to be reported for FBAR purposes. In any year that the taxpayer has more than $10,000 in foreign financial accounts, they are required to file the FBAR (FinCEN Form 114) electronically. The failure to file an FBAR can lead to significant fines and penalties. If the taxpayer is non-willful, it can lead to a $10,000 penalty per year which adjusts for inflation. If instead, the IRS believes that the taxpayer is willful, it can lead to a 50% penalty or a $2,000,000 penalty. Technically, there could be multiple years of penalties although the aggregate penalty should not exceed 100% value of the account for the compliance period.

Form 8938 Penalties

In addition to having to file the FBAR, Michelle must file Form 8938 (FATCA aka Foreign Account Tax Compliance Act) to report the foreign pension as a specified foreign financial asset. Typically, the penalty for form 8938 is $10,000 per year but there is also an up to $50,000 continuing failure to file penalty.

Form 3520/3520-A Penalties

The IRS may take the position that Michelle is the owner of a foreign trust and therefore she is required to file Form 3520 and Form 3520-A to report the foreign pension plan with her taxes. There can be significant fines and penalties for failing to comply with Form 3520 and Form 3520-A and while the penalties would not be as bad as the willful FBAR penalties, they could still be significant depending on how much the trust grows over time.

IRS Penalty Stacking

In recent years, there has been much litigation by taxpayers claiming that for them to get hit with all of these penalties it would exceed the value of the money that was in there in the first place. This is an example of penalty stacking and is inappropriate — although the IRS would disagree and most courts have sided with the IRS in these types of situations.

Imputed Income and Tax Penalties

In addition to penalties for failing to report the foreign accounts properly, there is also the concern of Michelle having income imputed to her based on the growth within the trust. Just because income is not being distributed from the trust does not mean Michelle can avoid paying taxes on the income. The IRS will take the position that the Malta Retirement Scheme is a non-employment/non-qualified trust, and therefore Michelle should include any income within the trust on her tax return, even if it is not being distributed. Likewise, there could be additional fines and penalties as well.

Potential Criminal Penalties

The IRS and DOJ may be overreaching in taking the position that violating a Malta Retirement Scheme is a criminal violation, since taxpayers were simply taking advantage of a loophole. But, it is yet to be seen whether relying on the loophole is sufficient to avoid or circumvent criminal enforcement. It if turns out that the U.S. government pursues criminal enforcement, it could lead to issues involving tax fraud, tax evasion, and related crimes.

What Should You Do Next?

Let’s explore some of your options:

Maybe You Should Do Nothing (Yet)

The first consideration is whether or not the IRS’ determination will apply retroactively. There is a good chance that it may, because Taxpayers may find it hard to convince the IRS that they legitimately believed they could circumvent the $7,000 Roth IRA contribution limitation maximum by submitting millions of dollars of cash and assets into a foreign personal pension plan or retirement scheme — which was not employment borne. But, each person has to assess their own risk tolerance along with the advice they may have received from a tax attorney, and whether or not they will be indemnified by that attorney in the future.

Go Back and Pay Taxes and Interest

The Taxpayer may consider paying back taxes and interest on the amount of unreported income that they claimed was exempt from U.S. tax. In general, taxpayers would gross up the Malta Pension Plan distributions similar to how they would gross up other types of distributions — and report the distributions (minus basis) as income. Unfortunately, as many of these taxpayers have avoided significant taxes for many years, along with the interest on the outstanding tax liability –– this may result in millions of dollars in tax liabilities and penalties — along with the issue of the IRS pursuing a tax fraud or tax evasion investigation.

Voluntary Disclosure (Reckless Disregard/Willful Blindness)

Taxpayers who thought their strategy was less than kosher but just thought they would not get caught may want to consider the IRS Voluntary Disclosure Program. That is because if the Taxpayer is audited before they submit to VDP and are found to be willful, the IRS may assess significant fines and penalties based on the value of the unreported income and whether or not the actual fund itself was properly reported on international information reporting forms such as FBAR and FATCA.

Streamlined Procedures (Non-Willful)

Depending on the type of advice the taxpayer may have received from counsel, they may be able to take the position that they were non-willful. This would qualify them for the Streamlined Filing Compliance Procedures. Whether the Taxpayer qualifies as willful or non-willful depends largely on the type of advice or memoranda/opinion letters the taxpayer received from the firm providing information on this type of investment in Malta.

Reasonable Cause

If the taxpayer can show they acted with reasonable cause and not willful neglect then the IRS cannot issue penalties — and if penalties were issued, the IRS is required to abate (remove) the penalties. Taxpayers should keep in mind though that each person’s facts and circumstances are different — and a strategy that may work for one taxpayer may not work for another Taxpayer (even if the facts are similar). Noting, all Taxpayers should avoid making a Quiet Disclosure.

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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.