IRS targets Malta pension plans: Compliance options

In recent years the IRS has become aware that U.S. taxpayers are participating in transactions known as “Malta pension plans” (Malta plans). Typically, in these transactions, a U.S. taxpayer sets up what is called a Malta personal retirement scheme (a tax-favored retirement plan under the laws of Malta) and contributes highly appreciated assets to the plan. After the contribution, the Malta plan typically sells the appreciated assets to a third party in exchange for cash, and the cash and any earnings on its investment after the sale are in turn used to make a series of distributions to the U.S. taxpayer.

Although the assets are sold for a significant gain, the U.S. taxpayer claims on his or her U.S. income tax return, relying on the pension fund provisions of the U.S.-Malta tax treaty,¹ that no tax is due on the income from the sale of assets, other income earned by the plan, or the distributions from the plan.

In 2021, the U.S. and Maltese governments entered into a competent authority arrangement (CAA)² that severely limits the types of pensions that qualify for treaty benefits under the Malta treaty. And, in more recent months, the IRS has formally indicated its disapproval of Malta plans by issuing proposed regulations identifying such plans as listed transactions and opening criminal investigations and civil examinations of taxpayers participating in them.³ Taxpayers should expect the IRS to continue its civil and criminal enforcement efforts as it obtains more information related to specific cases.

This article discusses the pension provisions of the U.S.-Malta tax treaty and the reasons why taxpayers claim that these provisions make income earned by and distributions from Malta plans nontaxable. It also provides an overview of the U.S. information reporting requirements of Malta plans that most participants in them have overlooked and the penalties for not complying with these requirements. Finally, it discusses ongoing IRS enforcement actions against Malta plan participants and what options these taxpayers may have to come into compliance with U.S. tax law and mitigate the civil and criminal penalties the IRS can assess for participating in the plans.

The Malta treaty

The Republic of Malta is a nation comprising five islands in the Mediterranean, south of Sicily and north of Libya. In 2008, the United States and the government of Malta signed a tax treaty. The claim that income earned by and distributions from a Malta plan are not subject to U.S. income tax is primarily based on the terms of this treaty.

Under the treaty’s terms, the U.S. and Maltese governments agreed to reserve their respective abilities to tax their residents and citizens except as modified under Article 1(5). Article 1(5) provides an exception for, among other things, pensions and pension funds. For purposes of the treaty, a pension fund is any person (defined as an individual, an estate, a trust, a partnership, a company, and any other body of persons)⁴ that operates principally to administer or provide pension or retirement benefits or to earn income for the benefit of a pension fund.⁵ A pension fund may be a resident of either the United States or Malta, depending on the country in which the fund was established.⁶ If a pension fund is established in the United States, it must be generally exempt from income taxation or, if established in Malta, it must be a licensed fund or scheme subject to tax only on income derived from immovable property situated in Malta.⁷

Provisions applicable to pensions and pension funds are in Articles 17 and 18 of the Malta treaty. Under Article 17, which governs the taxation of private (i.e., nongovernment service) pensions and annuities, social security, and child support, pensions are generally taxable in the country in which the taxpayer resides.⁸ However, the treaty also contains an exception to this general sourcing rule if the amount of a pension distribution, when received, would be exempt from tax in one country if the beneficial owner of the pension were a resident of that country.⁹

According to the Technical Explanation to the Malta treaty, this exception was agreed on by the U.S. and Maltese governments to permit consistent treatment of tax-exempt distributions from pension funds. For example, the Technical Explanation states that “a distribution from a U.S. ‘Roth IRA’ to a resident of Malta would be exempt from tax in Malta to the same extent the distribution would be exempt from tax in the United States if it were distributed to a U.S. resident.”¹⁰

Article 18 provides income tax rules associated with pension funds. Under this article, if an individual is a resident of one of the treaty countries and a beneficiary of a pension fund that is a resident in the other treaty country, income earned by the pension fund may be taxed as income to the individual only when and to the extent that it is paid to, or for the benefit of, that individual from the pension fund.

Maltese law

Maltese law permits its residents to establish various types of pension funds. One type — known as a “personal retirement scheme” — allows Maltese individuals or employers to contribute assets to a trust or other investment vehicle without any requirement that the contributions come from or otherwise be referenced to employment or self-employment income.¹¹ Furthermore, Maltese law permits participants to contribute unlimited amounts of cash and noncash assets to the retirement scheme.¹²

US taxpayer positions

U.S. taxpayers have claimed that Malta plans are not subject to U.S. income tax under Articles 17 and 18 of the Malta treaty. According to these taxpayers, neither the earnings (including earnings from the sale of appreciated assets) of a Malta plan nor distributions from one result in U.S. income tax.

The unique features of personal retirement schemes under Maltese law effectively permit U.S. taxpayers to “superfund” the scheme and do so with assets other than cash. Accordingly, U.S. taxpayers have contributed substantially appreciated assets to Malta plans, such as their ownership interests in companies or stocks and other securities. Unlike with analogous retirement plans in the United States, U.S. taxpayers are able under the Maltese rules to contribute such assets to these plans even when they have no employment or self-employment income during the tax year.

Recent US government actions

Dirty Dozen lists and CAA

The IRS annually publishes the “Dirty Dozen” list of what it considers the 12 most significant scams and abusive tax transactions for the year. Malta plans were included as one of the Dirty Dozen for the first time on the July 1, 2021, list. The Service cautioned taxpayers in a news release that the IRS was “evaluating [Malta plans] to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment.”¹³

On Dec. 21, 2021, the IRS announced that the competent authorities of the United States and Malta had signed a CAA “confirming” their understanding of the definition of pension funds in the Malta treaty.¹⁴ According to the CAA, to fall under the treaty definition of “pension fund,” a fund has to meet two requirements: First, the fund had to accept contributions of cash only; second, the fund had to limit contributions by reference to earned income from personal services (including self-employment) of the participant or the participant’s spouse. If a fund failed either of these requirements, the CAA states, the fund would not qualify for favorable tax treatment under the Malta treaty. Because many of the Malta plans set up by U.S. taxpayers failed one or both requirements, the effect of the CAA was to eliminate the treaty benefits claimed by these U.S. taxpayers.

After execution of the CAA, the IRS again listed Malta plans on the Dirty Dozen list it released on June 1, 2022.¹⁵ In this instance, the Service warned taxpayers that any tax benefits claimed under a Malta plan were “improperly” claimed because such funds would not qualify as “pension funds” under the Malta treaty.

On April 5, 2023, the IRS issued another annual Dirty Dozen list that again included Malta plans among the abusive schemes,¹⁶ noting that Malta plan participants generally “lack any local connection to [Malta]” and were “improperly” contending that the foreign arrangement constituted a “pension fund” for purposes of the Malta treaty. The IRS also warned that the “IRS Criminal Investigation Division is always on the lookout for promoters and participants of these types of schemes.”

Proposed regulations

On June 7, 2023, Treasury issued proposed regulations that, when finalized, would identify Malta plans as listed transactions.¹⁷ Listed transactions are reportable transactions and, as such, taxpayers who participate in listed transactions are required to submit IRS Form 8886, Reportable Transaction Disclosure Statement, with their tax return for each year they participate in the plan. In addition, taxpayers are required to submit a copy of the Form 8886 to the IRS’s Office of Tax Shelter Analysis (OTSA) at the same time that any disclosure statement is first filed by the taxpayer regarding a particular reportable transaction.¹⁸

Practice note: If the proposed regulations become final, U.S. taxpayers who participated in a Malta plan may have to file Form 8886 for prior tax years. Specifically, Regs. Sec. 1.6011-4(e)(2)(i) provides that if a listed transaction becomes a listed transaction after the filing of a taxpayer’s tax return reflecting the taxpayer’s participation in the listed transaction and before the end of the period of limitation for assessment for any tax year in which the taxpayer participated in the listed transaction, then a Form 8886 must be filed with the OTSA within 90 calendar days after the date on which the transaction becomes a listed transaction.

Taxpayers who fail to timely file a Form 8886 may be subject to significant civil penalties. For example, Sec. 6707A provides a penalty equal to 75% of the decrease in tax on a return associated with a transaction that is not properly disclosed on a Form 8886, subject to minimum and maximum penalties. Sec. 6662A also imposes an increased 30% accuracy-related penalty on any understatement where the taxpayer had a Form 8886 filing obligation but failed to timely file a Form 8886, if a significant purpose of the transaction required to be reported is the avoidance or evasion of federal income tax. Finally, taxpayers who are required to disclose a listed transaction but fail to file a Form 8886 are subject to an extended statute of limitation for assessment under Sec. 6501(c)(10).

Material advisers to participants in a Malta plan will also be subject to the listed-transaction rules if the proposed regulations are finalized. For these purposes, “material adviser” would be any person who provides material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, insuring, or carrying out a Malta plan, provided that the person also received compensation for those services. Material advisers must file Form 8918, Material Advisor Disclosure Statement, with the OTSA by the last day of the month that follows the end of the calendar quarter in which the person meets the “material adviser” definition with respect to a reportable transaction.¹⁹ In addition, material advisers would be obligated to maintain a complete list of each person or client who received aid, assistance, or advice from the material adviser with respect to a Malta plan.²⁰ Material advisers who fail to timely file Form 8918 or provide to the IRS their client list on request (or both) may be subject to significant penalties.²¹

IRS Criminal Investigation

Shortly after the IRS issued the proposed regulations on Malta plans, IRS Criminal Investigation (IRS-CI) began to initiate investigations of taxpayers and promoters who participated in such plans.²² These investigations have resulted in IRS-CI issuing summonses to the taxpayers and promoters.

Risks to taxpayers who participated in a Malta plan

Taxpayers who participated in Malta plans face various compliance risks. They may be liable for additional assessments of income tax and interest for their prior-year reporting obligations. Moreover, these taxpayers may be subject to various civil penalties and criminal prosecution. These risks are discussed more fully below.

International information return penalties

One risk facing taxpayers who participated in Malta plans involves international information return penalties.

Forms 3520 and 3520-A: Sec. 6048 requires U.S. taxpayers to file information returns with their income tax returns if they are engaged in certain transactions related to foreign trusts. Specifically, these taxpayers must file a Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Foreign Gifts, if they (1) created a foreign trust in the tax year, (2) transferred money or property (directly or indirectly) to a foreign trust in the tax year, or (3) received a distribution from a foreign trust in a tax year.²³ U.S. persons who are treated as grantors of foreign trusts must also file with their tax return a Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.²⁴ Although there are exceptions to the Form 3520 and 3520-A filing requirements, the IRS made it known in the proposed regulations discussed earlier that it believes many U.S. taxpayers who participated in Malta plans have Form 3520 and Form 3520-A reporting requirements.²⁵

Significant civil penalties apply if a U.S. person fails to timely and properly file Form 3520 or 3520-A. For failure to file a Form 3520, the IRS may impose a civil penalty equal to the greater of $10,000 or 35% of the “gross reportable amount,” which generally means the amount at issue — i.e., 35% of the amount transferred to the trust, held by the trust at the close of the year, or received as a distribution from the trust.²⁶ For failure to file a Form 3520-A, the IRS may also impose a civil penalty equal to the greater of $10,000 or 5% of the value of the foreign trust at the end of the tax year.²⁷ The IRS may impose these civil penalties separately and for each tax year that there was a reporting obligation for either form.²⁸

Example 1: A U.S. person establishes a Malta plan and contributes $1 million to it on Dec. 31, 2019. The U.S. person fails to timely and properly file a Form 3520 and Form 3520-A for 2019. In examining this taxpayer’s 2019 tax year, the IRS determines that the U.S. person had a Form 3520 and 3520-A filing requirement. On these facts, the IRS may seek to impose a civil penalty of $350,000 for the failure to file Form 3520 (i.e., 35% of $1 million), plus an additional civil penalty of $50,000 for the failure to file Form 3520-A (i.e., 5% of $1 million).

Form 8938: Sec. 6038D provides that a U.S. person must file Form 8938, Statement of Specified Foreign Financial Assets, with an income tax return if the person holds a threshold amount of specified foreign financial assets in a tax year. For these purposes, specified foreign financial assets include interests in foreign trusts, including interests in a foreign grantor trust.²⁹ The IRS may impose civil penalties of $10,000 per tax year for each failure to file a timely and proper Form 8938.³⁰ Continuation penalties also may apply if the IRS identifies and notifies the U.S. person of the failure to file and the U.S. person again fails to file a Form 8938 within a statutorily prescribed period of time after notification.³¹

FBAR: Title 31 of the U.S. Code requires U.S. persons who have a financial interest in, or signature or other authority over, a foreign financial account or accounts exceeding $10,000 at any time during a calendar year to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).³² A U.S. person’s interest in a foreign trust can give rise to FBAR reporting obligations.³³

Significant penalties may apply if a U.S. person has an FBAR reporting obligation but fails to timely file an FBAR for the year. For so-called nonwillful violations, the penalty is $10,000 (adjusted for inflation) per year.³⁴ Willful violations subject U.S. persons to increased civil penalties of the greater of $100,000 (adjusted for inflation) or 50% of the account balance at the time of the violation.³⁵ Criminal penalties of up to $250,000 and five years of imprisonment may also be imposed for willful failures to timely file an FBAR.³⁶

Example 2: Assume the same facts as Example 1, but in addition, the Malta plan deposits the $1 million into a Maltese bank. Under the governing Malta plan agreement, the U.S. person is treated as a grantor of the Malta plan for U.S. income tax purposes. The U.S. person fails to timely report the $1 million financial account on an FBAR. Consequently, this person may be liable for a civil penalty of up to $500,000 (50% of the account balance) if it is found that the U.S. person willfully failed to file an FBAR.

Criminal exposure

The Internal Revenue Code provides a multitude of criminal sanctions for failures to comply with income tax reporting and payment laws. For example, Sec. 7201 makes it a felony for any person to willfully attempt in any manner to evade or defeat any tax or tax payment imposed under the Code. Sec. 7203 makes it a misdemeanor for any person required to pay tax or file a return to willfully fail to do so.

Generally, whether a civil or a criminal penalty is imposed hinges on whether the taxpayer’s conduct was willful. For tax purposes, an act or conduct is willful if it constitutes a “voluntary, intentional violation of a known legal duty.”³⁷ Thus, in a criminal case, the government must show that (1) the law imposed a duty on the defendant; (2) the defendant knew of that duty; and (3) the defendant voluntarily and intentionally violated that duty.³⁸

The IRS considers several factors in determining whether to bring criminal charges against a taxpayer for a violation of the tax laws. For example, the taxpayer’s sophistication and education can play an important role. In Smith, ³⁹ the Fifth Circuit held that the defendant’s background as an entrepreneur was probative of willfulness. In Segal⁴⁰ and in MacKenzie,⁴¹ the Eighth and Second circuits, respectively, similarly concluded that willfulness may be supported based on the defendant’s being successful and experienced in business or the defendant’s having been educated in business and economics. Accordingly, well-educated, sophisticated taxpayers often have a higher risk of criminal prosecution than other taxpayers.

The complexity or ambiguity of the transaction or conduct is also relevant to charging decisions. In Mallas,⁴² the Fourth Circuit rejected the government’s argument that a defendant acted willfully when he participated in a coal mining tax shelter that provided deductions of minimum royalty payments. In holding against the government, the court noted that novel questions of tax law were raised that negated a finding of willfulness. Given the relative novelty of Malta plans, tax professionals could potentially raise this as a defense against any threats of criminal prosecution of their clients.

However, novel tax matters alone do not always suffice to negate willfulness, particularly if the transactions at issue violate well-established principles of federal tax law. In Krall,⁴³ the Eighth Circuit upheld a willfulness finding where the defendant participated in a foreign trust arrangement, notwithstanding the defendant’s contention that no federal court had ever declared the arrangement unlawful or illegal. The court sustained a willfulness finding because the scheme violated well-established principles of tax law. Defendants in other “sham transaction” cases have fared no better in many federal court decisions.⁴⁴

Tax professionals and their clients should recognize that, under Sec. 7201 or 7203,⁴⁵ the government generally has six years from the violation date to seek criminal prosecution.

Compliance options

U.S. taxpayers who participated in a Malta plan have various options to regain compliance with their U.S. income tax and reporting obligations. However, the list of options shrinks as the IRS continues investigating Malta plans because certain IRS programs for regaining compliance become unavailable if the Service learns of a taxpayer’s noncompliance from a third party or directly through its own examination or investigation.

Voluntary disclosure program

Historically, the IRS has permitted some taxpayers to come into compliance through submission of a voluntary disclosure.⁴⁶ Under the voluntary disclosure program (VDP), a taxpayer submits to the IRS information regarding the noncompliance along with original or amended tax returns that properly report the tax owed. Taxpayers who successfully enter the VDP face less risk of criminal prosecution. In such cases, and in lieu of other applicable civil penalties, the IRS typically imposes one civil-fraud penalty that amounts to 75% on the highest tax year.⁴⁷

Example 3: In 2019, a U.S. person establishes a Malta plan and (in the same year), contributes assets with a fair market value of $1 million and an adjusted basis of $250,000. In 2020, the Malta plan sells all the assets for $1 million, resulting in $750,000 of capital gains. The Malta plan invests these proceeds and earns an additional $100,000 in 2020. The U.S. person reported none of the capital gains or investment income on his 2020 U.S. tax return. And, although obligated to file Forms 3520, 3520-A, and 8938 as well as FBARs for 2019 and 2020, the U.S. person failed to file any of these forms.

To make a successful disclosure under the VDP, the U.S. person will have to amend his 2019 and 2020 tax returns. The amended returns for both years will each need to include Forms 3520, 3520-A, and 8938, and the U.S. person will need to separately file FBARs for both years. In addition, the U.S. person must report the $750,000 of capital gains and $100,000 of investment income that was not reported on the 2020 return. He must pay the income tax and interest associated with omitted income and must also pay a 75% fraud penalty on the resulting tax liability for 2020. Having taken these actions, the U.S. person generally will not be liable for other potential civil penalties related to Forms 3520, 3520-A, and 8938. Under the IRS’s VDP guidelines, however, he will be required to pay civil penalties associated with the unfiled FBARs for 2019 and 2020. In exchange for the disclosure and payment of tax, interest, and penalties, the IRS usually recommends no criminal prosecution of the U.S. person.⁴⁸

Significantly, the VDP has many technical requirements that taxpayers must meet to make a valid disclosure. One such requirement relates to whether the disclosure is timely. If a disclosure is not timely, the IRS will not permit the taxpayer to enter into the VDP, requiring the taxpayer to seek other options for compliance. A taxpayer’s disclosure is timely only if the taxpayer submits the disclosure prior to any of the following events: (1) the IRS initiates a civil or criminal investigation of the taxpayer; (2) the IRS receives information regarding the noncompliance from a third party (e.g., a whistleblower, a government agency, or a John Doe summons); or (3) the IRS acquires information directly related to the taxpayer’s noncompliance from a criminal enforcement action (e.g., search warrant or grand jury subpoena).⁴⁹ Because the IRS has communicated openly that it is actively conducting examinations of Malta plans, it is likely to continue to gain more information related to specific taxpayer noncompliance through these examinations. Accordingly, many taxpayers may be foreclosed in the future from submitting a disclosure under the VDP due to the timeliness requirement.

Streamlined filing compliance procedures

The IRS also offers a program known as the streamlined filing compliance procedures (SFCP).⁵⁰ Unlike the VDP, taxpayers who make a successful SFCP filing are generally required to pay a civil penalty of 5% of the amount of foreign assets not timely and properly disclosed on a Form 8938 or FBAR. In some instances, the 5% penalty may be reduced to zero if the taxpayer resided in a foreign country for a specified period prior to the SFCP submission.

Example 4: A U.S. person establishes a Malta plan in 2019. In that same year, the U.S. person contributes $100,000 of appreciated assets to the Malta plan. The Malta plan sells those assets in 2020 for a capital gain of $20,000. The Malta plan invests the proceeds and makes an additional $5,000 of dividends and interest from the cash sale. The U.S. person does not report the capital gain, interest, or dividend income on her 2020 tax return. The U.S. person also failed to file Forms 3520, 3520-A, and 8938 as well as FBARs for 2019 and 2020.

To make a successful SFCP disclosure, the U.S. person must amend her 2019 and 2020 tax returns to include all international information returns for those years. She also must report the $20,000 of capital gain and the $5,000 of other investment income on her 2020 amended tax return. In addition to paying any associated tax regarding the omitted 2020 income and interest on such tax, the U.S. person must pay a 5% miscellaneous penalty to the IRS as part of the SFCP. Assuming the account balance at the end of 2020 was $105,000, the U.S. person would pay a 5% miscellaneous penalty of $5,250. She will not be liable for any other civil penalties, including penalties related to the late-filed international information returns.

The primary distinction between the VDP and the SFCP is whether the taxpayer’s conduct in not filing all proper tax and information returns and not paying all required income tax was due to willful or nonwillful conduct. Only taxpayers who nonwillfully became noncompliant may utilize the SFCP; willful taxpayers are advised to use the additional protections of the VDP. According to IRS guidance under the SFCP, nonwillful conduct is “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”⁵¹ To determine whether the taxpayer’s noncompliance was indeed due to nonwillful conduct — and that the taxpayer thus qualifies under the SFCP — the IRS requires the taxpayer to submit a narrative of the noncompliance. Taxpayers should note that the IRS often reviews such narratives and that some taxpayers have been disqualified from the SFCP program due to conduct the IRS deemed was willful rather than nonwillful.

As with the VDP, taxpayers must make a timely SFCP filing to qualify for the program. Accordingly, taxpayers must make their SFCP submission before the IRS initiates a civil or criminal investigation.

Quiet disclosure

Although it is not a formal IRS compliance program, taxpayers may also regain compliance through filing original or amended returns for prior tax years, correctly reporting any nonreported transactions. This is known as a “quiet disclosure.”⁵²

Because a quiet disclosure is not a formal IRS compliance program, taxpayers who use it often have higher risks than if they had filed under either the VDP or SFCP. However, taxpayers with remote criminal risk who otherwise do not fall within the requirements of the VDP or SFCP may file a quiet disclosure and potentially obtain the advantage of the qualified amended-return (QAR) rules of Regs. Sec. 1.6664-2. Under the QAR rules, the IRS may not impose certain accuracy-related penalties if a taxpayer files an amended return prior to an IRS civil or criminal investigation and prior to the IRS’s otherwise obtaining information about the noncompliance. Taxpayers may not use the QAR rules, however, if they seek to amend an original return that was fraudulent.⁵³

Although certain taxpayers who participated in a Malta plan may qualify for some penalty protection under the QAR rules, tax professionals and their clients should also be aware that the IRS automatically assesses certain penalties for the late filing of international information returns. Accordingly, taxpayers who have not filed Forms 3520 and 3520-A may be subject to automatic penalty notices simply for the late filings. In these instances, the taxpayer would be required to contest the propriety of the civil penalties through normal IRS administrative procedures. Taxpayers should also be mindful that the submission of an amended return can constitute the making of harmful admissions, particularly if the IRS chooses to conduct a criminal investigation.

No action

Of course, taxpayers who participated in a Malta plan have a final option, which is to take no action and let the original returns stand on their own.⁵⁴ Here, taxpayers would be subject to civil penalties and additional tax only in the event that the IRS selected the taxpayer’s original return filings for examination. In most cases, the IRS would have three years from the date the original returns were filed to commence an examination. But participants in a Malta plan would likely have a significantly longer statute of limitation than three years, for several reasons.

First, the general three-year assessment period is extended if a taxpayer has a substantial omission of income.⁵⁵ An omission of income is substantial if the amount the taxpayer omits from gross income (1) should have been included on the return and (2) is more than 25% of the amount of gross income stated on the original return.⁵⁶ If the IRS can show that there is a substantial omission of income, the three-year period for the IRS to make an additional assessment of tax is extended to six years. Because Malta plans commonly result in omissions of income, the exception for such substantial omissions may apply to many taxpayer participants.

Second, there is no statute of limitation period for the IRS to make an assessment if the original return position was fraudulent.⁵⁷ Given the IRS’s enforcement actions and the CAA, it is likely that the IRS will raise the fraud exception to the three-year period for at least some returns filed before the CAA was issued on which income from a Malta plan has been omitted, based on a claim that the income is not taxable under the U.S.-Malta treaty. Moreover, the IRS may attempt to use the fraud exception to the general three-year assessment period in instances where a taxpayer filed a U.S. tax return claiming Malta treaty benefits for a tax year after the CAA was issued.

Third, the statute of limitation for assessment may be extended if a taxpayer had an obligation to file an international information return (e.g., Form 8938, 3520, and 3520-A) but failed to file the information return.⁵⁸ In these cases, the IRS has until three years after the date on which the taxpayer files the information return with the IRS to make an assessment of tax, at least, that is, with respect to the items associated with the information returns.⁵⁹ Because many U.S. taxpayers who participated in Malta plans may be unaware of the applicable information returns, the IRS may contend that the statute of limitation period to make an assessment remains open for these taxpayers even after the three-year period expires.

Careful weighing of options

The IRS has made it known that it intends to take civil and criminal action against Malta plan participants. Taxpayers who participated in a Malta plan should carefully consider any options they may have to regain compliance with prior-year tax reporting.

Footnotes

¹Convention Between the Government of the United States of America and the Government of Malta for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Malta treaty).

²Competent Authority Arrangement Between the United States and Malta Regarding the Definition of the Term “Pension Fund” (Dec. 3, 2021).

³REG-106228-22.

⁴Malta treaty, Art. 3(1)(a).

⁵Malta treaty, Art. 3(1)(k)(ii).

⁶Malta treaty, Art. 4(2)(a).

⁷Malta treaty, Art. 3(k)(i).

⁸Malta treaty, Art. 17(1)(a).

⁹Malta treaty, Art. 17(1)(b).

¹⁰Technical Explanation of the Convention Between the Government of the United States and the Government of Malta for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, at 53.

¹¹See REG-106228-22, 88 Fed. Reg. 37186, at 37189 (June 7, 2023).

¹²Id.

¹³IRS News Release IR-2021-144.

¹⁴IRS News Release IR-2021-253.

¹⁵IRS News Release IR-2022-113.

¹⁶IRS News Release IR-2023-71.

name=”fn_17″ id=”fn_17″ href=”#fnref_17″> >

¹⁸Regs. Sec. 1.6011-4(a).

¹⁹Regs. Secs. 301.6111-3(d) and (e).

²⁰Sec. 6112(a).

²¹Secs. 6707(a) and (b); Regs. Sec. 301.6707-1(a)(1)(ii); Sec. 6708.

²²Shaw, “IRS Launches Criminal Investigation Into Abusive Malta Pension Plans,” Federal Tax Update (July 14, 2023).

²³Secs. 6048(a)(3) and (c).

²⁴Sec. 6048(b).

²⁵REG-106228-22, 88 Fed. Reg. 37186, at 37190 (June 7, 2023).

²⁶Secs. 6677(a)(2) and (c).

²⁷Secs. 6677(b) and (c)(2).

²⁸See Wilson, 6 F.4th 432 (2d Cir. 2021).

²⁹Regs. Sec. 1.6038D-2(b)(4)(ii); Regs. Secs. 1.6038D-3(c) and (d).

³⁰Sec. 6038D(d)(1).

³¹Sec. 6038D(d)(2).

³²31 U.S.C. §5314; 31 C.F.R. §1010.350.

³³31 C.F.R. §§1010.350(e)(2) and (g)(5).

³⁴31 U.S.C. §5321(a)(5)(B); Bittner, 143 S. Ct. 713 (2023).

³⁵31 U.S.C. §5321(a)(5)(C).

³⁶31 U.S.C. §5321(d); 31 U.S.C. §5322(a).

³⁷Cheek, 498 U.S. 192, 200–1 (1991); Pomponio, 429 U.S. 10 (1976).

³⁸Cheek, 498 U.S. at 201; Beale, 574 F.3d 512, 517–18 (8th Cir. 2009).

³⁹Smith, 890 F.2d 711, 715 (5th Cir. 1989).

⁴⁰Segal, 867 F.2d 1173, 1179 (8th Cir. 1989).

⁴¹MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985).

⁴²Mallas, 762 F.2d 361, 361–65 (4th Cir. 1985).

⁴³Krall, 835 F.2d 711, 713–14 (8th Cir. 1987).

⁴⁴Tranakos, 911 F.2d 1422, 1431 (10th Cir. 1990) (sham transaction illegality well-settled); Schulman, 817 F.2d 1355, 1359–60 (9th Cir. 1987) (sham transaction clearly illegal).

⁴⁵Sec. 6531(2).

⁴⁶IRS webpage, IRS Criminal Investigation Voluntary Disclosure Practice.

⁴⁷Instructions for IRS Form 14457, Voluntary Disclosure Practice Preclearance Request and Application.

⁴⁸To the extent the U.S. person also had FBAR or other international information return filing obligations, the U.S. person must file those information returns as part of the VDP. Although the IRS generally does not impose civil penalties for failure to file most international information returns pursuant to existing VDP guidance, the Service will commonly impose FBAR penalties under the program. In these instances, the IRS examiner is instructed to follow the FBAR penalty mitigation guidelines of Internal Revenue Manual (IRM) Exhibit 4.26.16-2.

⁴⁹IRM Part 9.5.11.9(7) (Sept. 17, 2020).

⁵⁰IRS webpage, IRS Streamlined Filing Compliance Procedures.

⁵¹See Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures.

⁵²IRM Part 4.63.3.20 (April 27, 2021).

⁵³See also Dellinger, “The QAR: Handle With Care,” 54-4 The Tax Adviser 40 (April 2023).

⁵⁴Tax professionals should be mindful of their ethical obligations under Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), which require, among other things, that a practitioner advise a client when made aware of noncompliance, error, or omission and also advise the client of the potential consequences under the Code and regulations for the noncompliance, error, and omission (Circular 230, §10.21).

⁵⁵Sec. 6501(e).

⁵⁶Sec. 6501(e)(1)(A)(i).

⁵⁷Sec. 6501(c)(1).

⁵⁸Sec. 6501(c)(8).

⁵⁹If the taxpayer does not have reasonable cause for the failure to file the international information return, the entire tax year, rather than only the foreign transactions, remains open under the extended statute of limitation period. See Sec. 6501(c)(8)(B).

Contributor

Matthew L. Roberts, J.D., LL.M., is a partner with Gray, Reed, & McGraw LLP in Dallas. For more information about this article, contact thetaxadviser@aicpa.org.

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