Retroactive Compliance For Malta Pension Plan Taxes
Recently, 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? As with most things involving the Internal Revenue Service and international tax, pension plan participants may want to consider getting into offshore tax compliance on their own – before they are outed by the IRS. Here are a few potential resolutions.
Do Nothing, Will it Apply Retroactively?
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)
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.
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 individual 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.
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