Is a Malta Retirement Scheme Reported as a Foreign Trust?

Is a Malta Pension Plan Reported as a Trust

Is a Malta Pension Plan Reported as a Trust 

In recent years, the Malta Retirement Scheme (aka Malta Pension Plan or ‘MRS’) has become a key enforcement priority for the IRS and DOJ. That is because the U.S. government believes that many Taxpayers only opened their Malta Pension Plan in an attempt to circumvent the Roth IRA contribution limitations and move hundreds of millions of dollars into the retirement schemes, with the ultimate goal of avoiding taxes by way of a tax treaty loophole which has since been closed with the issuance of a Malta/US Competent Authority Arrangement (CAA). The IRS and DOJ are working together to crack down on these types of trusts, and are pursuing both criminal and civil investigations against U.S. taxpayers. One common question we receive often is whether a Malta Pension Plan is reported on Fodrms 3520 and 3520-A. Based on the way the Malta Pension Plan is established, chances are the IRS will require that it be reported as a foreign trust. Let’s look at what this means for U.S. taxpayers.

What is the Malta Pension Plan (MRS)?

The Malta Pension Plan is an investment plan designed to help taxpayers who invest in the plan save for retirement. It is a personal pension type of plan, which means it does not require that the pension be established via employment (401K). The Malta Retirement Scheme is usually sold through promoters as a tax shelter designed to allow investors to circumvent federal income tax rules on distributions, by selling the scheme as similar to a Roth IRA.

Why is it Reported as a Foreign Trust?

With this type of arrangement, there is a Trustee that is assigned to each person who invests in these plans, and the trustee is required to oversee the investment. This would make the arrangement a trust-type arrangement, with the investor as the beneficiary. As a result of this type of arrangement formation, the investment would be considered a trust for U.S. tax and reporting purposes. For example:

• • • “The Trustee will monitor all investments so that the principles of prudence and diversification are adhered to in the exercise of its trusteeship obligations.  Your regulated Investment Manager and Adviser (if you have one) should help us with this information.”

  • • “Trustee, is required to provide disclosures on how it considers sustainability risks and the impact of Environmental, Social, and Corporate Governance (“ESG”) factors for both the Personal Retirement Schemes and the Occupational Retirement Scheme it administers.”

Form 3520/3520-A Reporting

Since the Taxpayer would be deemed the owner of the foreign trust, presumably they would have to file a Form 3520-A. Some taxpayers may want to try to take the position that the MRS is a pension and not intended to be reported as a trust, but based on the increased scrutiny by the IRS, coupled with the fact that the value would usually exceed the limitations for tax-favored retirement and non-retirement foreign trusts, the IRS would presumably take the position it was reportable for Form 3520/3520-A purposes.

Malta Retirement Scheme Fines and Penalties

The penalties for not reporting Form 3520 and 3520-A for foreign trusts can be harsh. As provided by the IRS:

Form 3520-A Penalties

Section 6677

• • • A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause). Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable).

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    • • • 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I.

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    • • • 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III.

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    • • • 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679), if the foreign trust (a) fails to file a timely Form 3520-A and furnish the required annual statements to its U.S. owners and U.S. beneficiaries, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. If a foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 (and not the due date for the Form 3520-A, which is otherwise due by the 15th day of the 3rd month after the end of the trust’s tax year) in order to avoid being subject to the penalty for the foreign trust’s failure to timely file Form 3520-A.

        • For example, a substitute Form 3520-A that, to the best of the U.S. owner’s ability, is completed and attached to the U.S. owner’s Form 3520 by the due date for the Form 3520 (such as April 15 for U.S. owners who are individuals), is considered to be timely filed. See section 6677(a) through (c) and the instructions for Part II of this form and Form 3520-A.

        • Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. If the IRS can determine the gross reportable amount (defined later), then the penalties will be reduced as necessary to assure that the aggregate amount of such penalties does not exceed the gross reportable amount. For more information, see section 6677.

Form 3520 Penalties

• • • The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value (defined later) of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year if the foreign trust

      • • (a) fails to file a timely Form 3520-A, or

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        • (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(a) through (c). If a foreign trust fails to file a Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to the U.S. owner’s Form 3520 by the due date of the U.S. owner’s Form 3520 (and not the due date for Form 3520-A) in order to avoid being subject to a penalty for the foreign trust’s failure to file a Form 3520-A.

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        • For example, a substitute Form 3520-A that, to the best of the U.S. owner’s ability, is completed and attached to the U.S. owner’s Form 3520 by the due date for the Form 3520 (such as April 15 for the U.S. owners who are individuals) is considered timely filed.

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        • Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. If the IRS can determine the gross value (defined later) of the portion of the trust’s assets treated as owned by the U.S. person at the close of the tax year, then the penalties will be reduced as necessary to assure that the aggregate amount of such penalties does not exceed the gross value of the trust. For more information, see section 6677.

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        • Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.