Since 2021, Maltese personal pension plans have been on the IRS radar as a “Dirty Dozen” transaction.  The Dirty Dozen are the “worst of the worst tax scams.”  Yesterday, the IRS significantly stepped-up enforcement against individuals with private Malta pension plans.

In the transaction, a U.S. person creates a personal pension in Malta and contributes appreciated assets to the plan.  Ultimately, the plan liquidates the assets and distributes the proceeds and any gains realized by the plan to the U.S. person.  Taxpayers and their advisors take the position on their U.S. tax return that the distribution and any gains, are not taxable in the U.S. based on the U.S.-Malta tax treaty (the “Treaty”).

On December 27, 2021, the IRS published a Competent Authority Arrangement between the United States and Malta clarifying the types of plans that will be treated as a pension pursuant to the Treaty.  I.R.B. 2021-52.  Specifically, Maltese plans that do not limit contributions to cash earned from employment or self-employment do not constitute a pension fund.

Reportable Transactions

Reportable transactions are those transactions that the IRS has designated as being potentially abusive or which have certain hallmarks, such as large losses or tax confidentiality.  Listed transactions are a subcategory of reportable transactions that the IRS believes are very abusive, and carry significant penalties.  Taxpayers who fail to disclose a listed transaction are subject to an open-ended statute of limitations on assessment, meaning that the IRS can audit such taxpayers well beyond the normal three-year period applicable to most tax returns.

IRS’s Proposed Regulation

On June 7, 2023, the Treasury Department published a proposed regulation to designate the Malta personal retirement plan as a listed transaction.  After a notice and comment period and public hearing, the IRS will likely issue a final regulation in late 2023 officially designating the Malta personal pension transaction as a listed transaction.

The proposed regulation also noted that these Maltese pension plans are likely subject to international return reporting including on Forms 3520, 3520-A, and 8938.  Not only are these forms subject to their own penalties, but failure to file a required international informational return also results in an open statute of limitations.

Implications

If you or your clients invested in a Malta pension plan, please consult a tax advisor for an analysis of your situation in light of the IRS’s proposed designation as a listed transaction.  In addition to the numerous disclosure requirements, taxpayers should consider whether to amend their tax returns to report the transaction.  If audited, taxpayers who did not report gains and distributions from a Malta pension plan could have tax liabilities and accuracy-related penalties.  We have extensive experience with reportable transactions, including those relating to captive insurance companies and syndicated conservation easements.