Retroactive Compliance For Malta Pension Plan Taxes

Retroactive Compliance For Malta Pension Plan Taxes 

Back in 2021, the United States and Malta issued a CAA (Competent Authority Arrangement) acknowledging, that US Taxpayers’ attempts to utilize certain Malta personal pension and retirement schemes as Roth IRA alternatives were not going to fly. 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, the U.S. Government pursued many U.S. taxpayers who they believed misinterpreted the US/Malta tax treaty — and in some cases even going so far as serving them with both civil and criminal summonses. 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 outed by the IRS. 

*This is a 2024 Update to our original 2022 Article.

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 $6,500 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 could go back and pay tax and interest on the amount of unreported income that they did not include –– because they claimed it as being exempt from US tax. In general, taxpayers would gross up the distributions similar to how they would gross up other types of distributions — and determine what the tax liability would have been. 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 a significant outlay of money.

*There is the other issue of whether the IRS will issue penalties such as underpayment/inaccuracy penalties along with possible Tax fraud or Tax Evasion Penalties.

Voluntary Disclosure (Reckless Disregard/Willful Blindness)

For those Taxpayers who really did not think they were doing anything kosher, but simply did not think that they would get caught—they may want to consider the IRS Voluntary Disclosure Program if they believe the Internal Revenue Service can take the position that the Taxpayer acted with the intent to avoid US tax obligations — or even reckless disregard or willful blindness. This may lead to 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 if tax counsel assured them that there was no issue — and therefore any mistake would be a non-willful violation and not willfulness, which qualifies for the Streamlined Filing Compliance Procedures. This will depend largely on the type of advice or memoranda/opinion letters that the taxpayer received from the firm providing information on this type of investment in Malta.

Reasonable Cause

If the taxpayer acted non-willful, then they can typically make a reasonable cause statement submission showing that they acted with reasonable cause and not willful neglect. But each person’s situation, facts, and circumstances are different — and what strategy may work for one taxpayer may not work for another based on the totality of the circumstance. Noting, Taxpayers should avoid making a Quiet Disclosure — especially where the IRS already identified the matter as part of the Dirty Dozen — should be avoided.

Before making any proactive representation to the Internal Revenue Service tax para should consider speaking with a Board-Certified Tax Law Specialist who focuses exclusively in offshore tax and compliance — so that they can get a good understanding (in lieu of their own facts) and better lay of the land.

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.