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IRS Cracks Down on Potentially Abusive Malta Pension Plans by Joseph Leocata, JD, CPA, MBA

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Posted on August 30, 2023 by Joseph Leocata

The IRS’s Criminal Division ramped up its enforcement efforts relating to Maltese pension plans, which gained popularity after the signing of the U.S.-Malta Tax Treaty 2011 and the subsequent enactment of Malta’s Retirement Pension Act of 2011. In recent weeks, the department began issuing summons to U.S. taxpayers who participated in Maltese pension plans and may have claimed improper U.S. tax exemptions on contributions of noncash assets, earnings and gains within those plans, and distributions they receive from the sale of plan assets.

The IRS first identified Maltese pension plans as “potentially abusive” arrangements when it added them to its annual list of the top-12 tax scams of 2021. According to the agency, U.S. taxpayers misconstrued the tax treaty’s provisions as a loophole for avoiding U.S. tax liabilities. To close this loophole and clarify its position that taxes are due on ordinary gains recognized upon the disposition of a plan’s assets and distributions of its proceeds, the U.S. entered into a Competent Authority Agreement and urged taxpayers to proceed with caution.

These tax schemes also made the IRS’s lists of “Dirty Dozen Tax Scams” in 2022 and 2023. Earlier this year, the IRS issued proposed regulations declaring Malta pension funds “listed transactions” that could lead to taxpayer penalties as high as $200,000 for a failure to report taxable transactions.

If you receive a summons from the IRS, contact your CPA and tax advisors to determine the next steps, which may include hiring legal counsel. For all other taxpayers, now is a good time to confirm their compliance with all their foreign reporting requirements and take immediate action to rectify any failure to report required transactions and pay the taxes due.

About the Author: Joseph Leocata, JD, CPA, MBA, is a senior manager of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with individuals and businesses on a broad range of federal, state and local tax issues, including representation before the IRS on tax controversy matters. He can be reached at the CPA firm’s New York City office at (646) 213-7600 or info@bpbcpa.com.