The monthly agendas were packed with tedious tax issues, but the vibe was undeniably smug.
For more than a year, wealth management advisers gathered online to hash out strategies to defend wealthy Americans stashing billions in Maltese individual retirement arrangements. The offshore tax shelters purportedly permitted millionaires and billionaires to deposit their riches in retirement accounts without the limits and tax consequences found in domestic IRAs.
The recent arrival of auditors from the Internal Revenue Service was treated as a petty annoyance. Even a discussion of the IRS’s new funding to crack down on abusive tax schemes turned into trash talk about the agency.
“The feeling had been that the IRS was too simple, too lazy, or too stupid to figure out what we were doing,” said one prominent wealth adviser who attended several of the online “townhall meetings.”
Still, there was plenty at risk if wealth professionals lost control of ambiguous language in a tax treaty with Malta, a tiny Mediterranean island nation widely regarded as a tax haven. Hundreds of moneyed clients were sitting on billions in untaxed income in secretive accounts. The wealth adviser said a single Maltese trust company held $1.5 billion of income unreported to the IRS on behalf of US taxpayers, translating into a federal tax loss of roughly $360 million and another $180 million to state and local governments.
And if the IRS ever caught up with them, the wealth advisers, accountants, and attorneys at these meetings risked losing millions in fees for selling tax shelters that others in the industry wouldn’t touch.
But the government did challenge the retirement structures. On June 6, the IRS and the Department of Treasury proposed a rule requiring wider disclosure of Malta pension plans. A few weeks later, the IRS served hundreds of criminal summonses on Malta plan investors and tax shelter promoters. The agency demanded lists of clients, Social Security numbers, addresses, phone numbers, invoices, and records of communications.
“Every one of us knew this was a sham as it lacked any economic substance, especially the taxpayers who came to us looking for a way to evade taxes,” said the adviser, who spoke on condition of anonymity due to potential legal exposure. “Because of the large fees, we played audit roulette and hoped that the IRS would never challenge it.”
No charges have been filed so far. The status of the proposed transparency rule and the criminal probe remain unclear. At the same time, some wealth professionals and their clients were evicted from the tolerable world of civil audits and thrust into the criminal tax fraud arena.
The IRS declined to comment for this story, but Commissioner Daniel Werfel has continually condemned abusive tax schemes, including Malta pension plans. As recently as Sept. 8 the commissioner said he would use new funds to target, “those posing the greatest risk to our nation’s tax system, whether it’s the wealthy looking to dodge paying their fair share or promoters aggressively peddling abusive schemes.”
‘Too Good to Be True’
Bloomberg Tax reviewed confidential solicitation documents provided by two separate sources involved in the wealth management industry. They included pitch decks and legal opinions both affirming and disputing the legitimacy of these tax structures. Bloomberg Tax also reached out to more than a dozen wealth advisers and attorneys in the US and Malta, and promoters whose names are on emails about the confidential meetings.
The review shines a light on a decade-long effort to persuade wealthy Americans, with no connections to Malta, to plow their riches into retirement accounts designed to make taxes on dividends, interest, and capital gains disappear. It also revealed a group of wealth managers and tax attorneys who warned clients against these accounts, arguing they transcended the intentions of US and Maltese authorities who shook hands on the tax treaty in 2008 and codified it in 2011.
Malta pension plans function as “supercharged, cross-border Roth IRAs” according to a 2017 online article by Jeffrey Rubinger and Summer LePree, former tax attorneys with Miami-based Bilzin Sumberg Baena Price & Axelrod LLP.
The memo explained that Malta arrangements differ from qualified US pensions and individual retirement accounts in three ways. There are no requirements restricting contributions to income earned from employment. There are no upper limits on contributions. Finally, there are no restrictions on asset classes, allowing participants to place cash, securities, business interests, real estate, and cryptocurrency in their accounts. Income earned from dividends, interest, and capital gains appreciate untaxed.
Beneficiaries of these arrangements can remove funds beginning at age 50 with a 30% distribution. Subsequent distributions can be taken after three years in the amount of 50% of the remaining balance each year. Promoters assert these distributions can’t be treated as taxable income and direct their clients to cite Malta tax treaty benefits when filing their returns.
Rubinger and LePree acknowledged in their 2017 memo that some believe the tax benefits are “too good to be true,” and were never intended by the Treasury Department. Still, “participants in Maltese pensions can contribute after-tax dollars to the plan and never pay future tax on profits realized with respect to assets held in the plan,” wrote Rubinger and LePree, who now work in the Miami office of Winston & Strawn LLP.
LePree declined to comment. Rubinger, however, said he continues to believe the investment structures are viable.
Andrew S. Fielding, a wealth management executive with ASF International LLC in Wilmington, N.C., offered a “case study” of the tax benefits of Maltese structures in an undated pitch deck. The example describes how a 55-year-old entrepreneur named Seth used a Malta pension account to avoid taxes on a $45 million capital gain from an initial $5 million investment in a software firm. The example describes how Seth bypassed $16.4 million in federal, state, and city taxes, and took an immediate cash distribution of $15 million from his account. Fielding didn’t respond to a request for comment.
A cottage industry of high-priced advisers, accountants, and attorneys facilitates these transactions, the anonymous wealth adviser and others with knowledge of these arrangements said. For each deal to close, three parties need to be paid: the trust company administering the plan, earning up to 1.5% of the value of the contributed assets; the attorney offering a written opinion blessing each deal, earning between $70,000 and $150,000 per opinion; and, the financial professional promoting the arrangement, earning at least 1% of the value of the assets.
Many promoters latched onto a 2011 opinion letter crafted by the Maltese law firm Ganado & Associates. Ganado blessed plans marketed by Dominion Fiduciary Services, but also cautioned that its advice expressed, “no opinion on the laws of any jurisdiction, especially the USA, other than Malta.”
The wealth adviser, who quit pitching Malta plans two years ago, said the industry barely mentioned the program’s retirement-planning features. Instead, promoters targeted entrepreneurs, venture capitalists, and real estate tycoons looking to cash out big-ticket investments without paying taxes.
‘Never Passed the Smell Test’
Other wealth management advisers who did not participate in these meetings, however, viewed Malta plans as toxic and shielded their clients from “audit roulette” with the IRS. The skeptics said the plans didn’t resemble legitimate pensions under US law or the terms of the treaty. The deals also conflicted with the economic substance doctrine, a feature of the Internal Revenue Code since 2010 that bars transactions with no true economic or business purpose other than tax avoidance.
Jimmy Sexton, founder and chief executive of the Dubai tax and wealth advisory firm Esquire Group, remembers hearing about the programs from retirement administrators in Malta roughly five years ago and then reading through the technical explanation of the bilateral tax treaty. Sexton’s review found US taxpayers were only able to claim tax-free distributions in consideration of past employment, raising significant doubts about the promoters’ claims that earnings on assets unrelated to past employment such as real estate or securities could be distributed tax free.
“On its face, it just never passed the smell test with me,” Sexton said. “I made a decision that for me this is just too risky.”
Scott Diamond, president of wealth management firm Roxbury Consultants in Marina Del Rey, Calif., said he was astounded anyone in his profession could promote the idea US and Maltese authorities intended to create a blanket tax waiver on capital gains that wasn’t available in any other jurisdiction.
“There were so many people asking me to sell this, and I was like ‘you gotta be kidding me.’ There’s legal tax avoidance, but this was straight up evasion,” Diamond said.
The wealth adviser eventually came to the same conclusion.
“If you wanted to sell this, you had to sell it hard,” the adviser said, “Ninety-nine of 100 lawyers not in the cartel would shut it down completely.”
In the realm of high-stakes tax controversies, however, there is a difference between ethically defensible conduct and legally defensible conduct, said Bryan Skarlatos, a tax partner at Kostelanetz LLP.
Skarlatos, who represents several taxpayers and promoters who received criminal summonses, says the treaty’s “plain language” permitted his clients to create and market these tax shelters. Skarlatos contends the conduct didn’t constitute criminal tax fraud, but he acknowledged some financial planners were warning clients the plans were “too good to be true” and an invitation for an audit.
“Those people wouldn’t want that under any circumstance and that’s fine,” he said. “But just because the IRS is going to disagree doesn’t mean you can’t do it.”
Potentially Abusive
The government’s focus came to light on July 1, 2021, when Malta pension plans appeared on the IRS’ “Dirty Dozen List” of dubious tax schemes. The IRS called the plans a “potentially abusive” use of the US-Malta tax treaty and advised taxpayers to avoid them.
In December 2021, the US and Malta executed a competent authority arrangement (CAA), seeking to clarify the definition of the term “pension fund” after observing taxpayers with no connection to Malta setting up plans and “misconstruing the pension provisions of the Treaty to avoid income tax.” The agreement confirmed any plan allowing a taxpayer to contribute property other than cash, or placing no limits on contributions of income earned from employment and self-employment, can’t be considered a pension fund for the purposes of the treaty.
Within a month, the industry mobilized to push back. The Gottlieb Organization, a Woodmere, Ohio wealth management consulting firm, convened on Zoom industry professionals and attracted veteran tax lobbyist Kenneth Kies, managing director of the Federal Policy Group LLC, to steer the effort. An early solicitation expressed concern the CAA would eventually emerge as a binding regulation, enforceable by the IRS.
Bloomberg Tax sought comments from Kies and Gottlieb executives several times, but received no response.
For more than a year the Malta townhalls focused on the status of IRS civil audits and legal strategies for challenging the CAA. The confident tone portraying the IRS as too inept to attack, however, descended into “panic,” the wealth adviser said, on June 6, when the IRS and Treasury issued a proposed rule characterizing Malta pension plans as “listed transactions"—improper tax avoidance strategies requiring disclosures to the government.
Participants took the regulation as an indication the government planned to escalate its scrutiny. The regulation also pulled Malta promoters and their clients squarely into IRS auditors’ cross hairs.
The group met again June 20 and discussed several options for responding to the listed transaction notice. A separate discussion focused on House Republicans’ efforts during the debt ceiling negotiations to cut some of the $80 billion in IRS funding from the Inflation Reduction Act.
“I don’t want anyone to get their hopes up that the IRS is going out of business tomorrow, but it will require the IRS to start thinking about how they’re going to prioritize their audit resources,” one participant said, according to a recording of the meeting provided by the wealth adviser.
Full-Frontal Assault
Within days, however, the IRS served hundreds of criminal summonses on taxpayers and promoters. The probe involved a first-of-its-kind alliance between the IRS’s Criminal Investigation and Large Business and International divisions. Several large law firms wrote memos, readily available on the internet, recommending clients assert their Fifth Amendment right against self-incrimination in any interactions with IRS criminal agents. The townhalls were suspended indefinitely, while a steering group concentrated on “submitting a reasoned review and response to the proposed regulations,” according to a July 17 email among members of the group.
The listed transaction rule received just three anonymous letters and one signed letter when the public comment period closed Aug. 8. One of the unsigned letters represented the townhall participants’ collective views, the wealth adviser said.
“The only way to make the pension fund requirements outlined in the Malta Proposed Regulation part of the Treaty is to amend the Treaty to make those changes, and have amendments ratified in both Malta and the United States pursuant to the laws of each country,” the letter states.
During an American Bar Association tax program last month, Elena Virgadamo, the Treasury department’s deputy international tax counsel for treaty affairs, rejected the view that US and Maltese authorities sought to retroactively amend the treaty, and dismissed assertions the parties lacked authority to clarify the terms in response to examples of abuse.
“The competent authorities got together to discuss and reflect in the CAA that this was not what the parties originally intended when we negotiated the treaty,” she said at the event. “The treaty allows the competent authorities to resolve any doubts under the treaty.”
Won’t Back Down?
Skarlatos said in an interview the IRS overplayed its hand.
But former commissioner Charles Rettig told Bloomberg Tax “the IRS should not and will not drop the Malta pension plan examinations at this time.” New funding headed to the agency—resources he lacked during his tenure—will be prioritized to examine the conduct of Malta promoters and participants.
“Over the next few years, as the IRS hopefully recruits and trains more technical, specialized examiners (accompanied by enhanced technology), taxpayers should anticipate an increasingly significant compliance presence focused on the Malta pension plan arrangements,” Rettig said in an email.
Rettig also stressed the importance of the listed transaction rule in the face of an increasingly aggressive tax shelter industry. If the regulations become final, material advisers will be subject to “special record keeping rules” that will further assist the IRS, he said.
The current audit sweep and criminal probe could take years to fully unwind, said John Colvin, a tax partner at Colvin + Hallett in Seattle, who wasn’t involved in selling or approving these pension plans. Attorneys who helped facilitate investments in Malta pension plans are particularly vulnerable, he added.
“Anytime there is a criminal investigation the anxiety level is through the roof,” he said. “Obviously, a criminal investigation is a very different animal for a lawyer because not only do you have some exposure for prison time, but you would quite likely lose your license if the prosecution is successful.”
Meanwhile, wealth advisers who promoted the plans remain anxious.
“For people like me, this is the stuff that nightmares are made of,” the wealth adviser said. “I live in a constant state of anxiety about getting that knock on the door and ending up in jail.”
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