Wealthy Targets of IRS Malta Probe Get Letters Walking It Back

The IRS has rescinded some criminal summonses from its crackdown on Malta pension plans, raising questions about whether the agency is backing off or retooling its aggressive campaign targeting the offshore tax schemes.

Three attorneys interviewed by Bloomberg Tax said more than 30 of their clients had received a withdrawal letter last week. The IRS declined to comment.

It’s not clear whether the withdrawal letters represent a revision to the investigation’s focus into the potentially abusive schemes. If so, it would be a striking reversal after the agency sent out hundreds of summonses in June to wealthy Americans sheltering assets in Malta and their advisors.

Fernando Juarez, an attorney with Freeman Law in Frisco, Texas, speculated IRS Criminal Investigation may have decided to drop summonses targeting taxpayers investing in Malta plans and concentrate on promoters of the tax schemes.

“The government is not leaving this,” he said. “I think they are going to pursue the principal actors, and those would be the promoters and anyone getting taxpayers to engage in these types of schemes.”

A letter announcing the rescinded summons, obtained by Bloomberg Tax, states that the agency’s June demand for information had been withdrawn and advised, “do not take further efforts to comply with the summons referenced above.”

The brief letter, dated Dec. 4, specifies the agency hasn’t used any information or records collected by IRS Criminal Investigation, adding physical records will be returned and “any electronic responsive records have been destroyed.” The letter, signed by IRS Criminal Investigation special agent Brian Visalli, gives no rationale or legal basis for the agency’s decision, but advises taxpayers to retain any records responsive to the summons “as you may receive subsequent legal process for those records.”

Malta retirement arrangements have appeared on IRS’s “dirty dozen” list of potentially abusive tax scams for more than two years. In tandem with the issuance of criminal summonses in June, IRS proposed a rule characterizing Malta plans as “listed transactions"—improper tax avoidance strategies requiring higher levels of disclosure to the government.

The agency’s new posture was greeted with a sigh of relief from Malta plan promoters, who had spent four months fearing criminal tax fraud charges for themselves and their clients.

“It’s the best news I’ve had all year,” said one prominent wealth adviser, who received a withdrawal letter. “Now all the money I was going to spend on attorneys fees next year can go towards Christmas presents.”

New Focus?

Former IRS commissioner Charles Rettig said any adjustment to the criminal probe wouldn’t affect the current pattern of civil audits. “Withdrawing the Summons’ does not translate, at least not yet, into walking away from civilly examining the transaction,” he said in an emailed message.

But Dennis Ventry, a professor at the University of California-Davis School of Law and former chair of the IRS Advisory Council, questioned whether IRS had essentially “bowed to its critics,” and walked away from a potential criminal fraud that costs the government “more than half a billion dollars.”

“If the service determined the summonses were improperly served, then it had to rescind them to avoid tainting any subsequent investigation or prosecution,” he said. “But if it bowed to a bunch of criticism from white-shoe law firms that were inexplicably concerned about pensioners and 401k retirees improperly receiving summonses, then something may still be rotten in the state of Malta.”

The withdrawal letters come one month after Bloomberg Tax published a broad examination of the marketing of Malta pension plans by a small group of wealth advisers and law firms. The tax schemes assert ambiguous language in a tax treaty with the tiny Mediterranean island nation of Malta and permit millionaires and billionaires to park assets in secretive retirement accounts without the limitations and tax consequences embedded in domestic IRAs.

‘Incredibly Difficult Criminal Case’

Bryan Skarlatos, a partner in the New York office of Kostelanetz, confirmed several of his clients received withdrawal letters, adding he’s certain “many, many more” were distributed by IRS. Skarlatos characterized the action as “a recognition that the summonses were improperly issued” and a decision to “focus the criminal investigation more narrowly while allowing many of the civil audits to proceed.”

Tom Cullinan, a shareholder in the Atlanta office of Chamberlain Hrdlicka and a harsh critic of the IRS in the Malta investigation, said “most,” if not all, of his clients had received withdrawal letters. While the letters don’t specify the agency’s motivations, Cullinan suspects Criminal Investigation concluded it wouldn’t be able to demonstrate criminal fraud because the tax controversies boil down to technical interpretations of a treaty.

“I just think it’s an incredibly difficult criminal case,” said Cullinan, who served as acting IRS chief of staff to former commissioner Rettig. “They could have people with some special facts, something unique going on that I don’t know anything about. But generally speaking, I didn’t see any criminality there. So I was glad to see the summonses withdrawn. I hope they did it for the right reasons.”

Dallas tax controversy attorney Josh Ungerman, who has “quite a few” Malta plan clients, said all of them had received withdrawal letters. Ungerman, a partner with Meadows Collier and a former IRS trial attorney, said he believes IRS contacted both taxpayers and at least some Malta plan promoters.

Ungerman said it’s entirely possible IRS plans to toss the criminal investigation to the Department of Justice and focus exclusively on a handful of high-profile Malta plan promoters. Criminal tax cases are prosecuted by either the Tax Division of the Justice Department or the Office of the United States Attorney, which would convene a grand jury and possibly issue criminal indictments.

“I think it means either they intend to empanel a grand jury, or have empaneled a grand jury, in the parallel investigation,” Ungerman said. “It would be nice if the IRS shut down the entire inquiry, but I don’t think that’s going to happen.”

Cullinan specifically faulted the agency for using its authorities to conduct a fishing expedition, netting information about qualified rollovers from UK pensions, which aren’t illegal. Summonses targeting these “QROPS” transactions, he said, wouldn’t yield any relevant information to the investigation.

“I have been pretty critical of IRS CI about the way they went about this particular investigation—the scope,” Cullinan said. “It included a number of people, who frankly should not have been included.”

Ventry, the California law professor, said IRS shouldn’t back down if it has reasonable evidence of fraudulent conduct.

To the extent the agency’s information demands might have been “over-inclusive,” Ventry said the IRS could and should issue a narrower batch of summonses targeting the individuals and the conduct of greatest concern. He called the criticism over QROPS transactions a “chum-in-the-water” argument, designed to obscure a costly tax avoidance scheme benefiting a few hundred Americans.