The IRS unveiled proposed rules on June 6, 2023 that would require disclosure of certain tax-free Maltese retirement accounts following recent attempts to regulate what it said were abusive pension plans that took advantage of the U.S.-Malta tax treaty.
The agency is seeking feedback on the proposed rules, which would designate certain Malta personal retirement funds and substantially similar arrangements as listed transactions that would have to be reported to the Internal Revenue Service or be subject to stiff penalties.
The U.S. Department of the Treasury and the IRS "believe that transactions involving a Malta personal retirement scheme described in the proposed regulations, and substantially similar transactions involving a retirement arrangement established in Malta, unless specifically excepted, are tax avoidance transactions and should be identified as listed transactions," the agency said in the preamble to the proposed rules.
The U.S. and Malta agreed in December 2021 that investment arrangements that allowed noncash contributions and did not limit contributions to funds from employment or self-employment would not be considered retirement plans under the two countries' 2008 tax treaty. Earlier in 2021, the IRS placed Maltese pension plans on its "Dirty Dozen" list of abusive tax shelters, along with syndicated conservation easements and abusive micro-captive arrangements.
Listed Malta retirement arrangements under the proposed rules involve a U.S. citizen or resident alien who doesn't include earned or gained income on a personal retirement account established under Malta's Retirement Pensions Act of 2011 in federal taxable income due to an interpretation that the treaty exempts such transactions.
They also involve a U.S. citizen or resident alien not reporting a distribution from a Malta personal retirement account in federal taxable income due to a similar interpretation of the tax treaty, according to proposed rules.
The IRS plans to exempt policyholders that transferred their foreign pension or retirement arrangements to a Malta retirement account in accordance with foreign law and claimed exemption from U.S. income tax for earnings or distribution filed before the publication of the proposal, according to proposed rules.
Treasury and the IRS "are aware that the United Kingdom allows tax-deferred transfers from its pension or retirement schemes to certain 'qualified recognized overseas pension schemes' (or QROPS), including Malta personal retirement schemes," the proposed rules said.
The IRS scheduled a public hearing for Sept. 21 on the proposed rules. The agency unveiled the proposal following several court decisions that struck down IRS subregulatory notices that designated certain potentially abusive arrangements as listed transactions.
In one high-profile case, Mann Construction v. U.S., the Sixth Circuit ruled last year that the IRS' 2016 notice listing microcaptive arrangements as listed transactions had violated the Administrative Procedure Act because it did not go through the formal notice-and-comment procedures. The agency proposed rules that designated microcaptive arrangements as listed transactions in April.
Taxpayers who have already claimed the purported tax benefits of one of these four transactions on a tax return should consider taking corrective steps, such as filing an amended return and seeking independent advice.
Where appropriate, the IRS will challenge the purported tax benefits from the transactions on this list, and the IRS may assert accuracy-related penalties ranging from 20% to 40%, or a civil fraud penalty of 75% of any underpayment of tax.
The IRS remains committed to having a strong, visible, robust tax enforcement presence to support voluntary compliance. To combat the evolving variety of these potentially abusive transactions, the IRS created the Office of Promoter Investigations (OPI) to coordinate service-wide enforcement activities and focus on participants and the promoters of abusive tax avoidance transactions.
The IRS has a variety of means to find potentially abusive transactions, including examinations, promoter investigations, whistleblower claims, data analytics and reviewing marketing materials.
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