This episode of Planet Money explores the life cycle of a tax loophole through the case of the Malta retirement account scheme, which allowed wealthy Americans to stash appreciated assets tax-free using a US-Malta tax treaty. The story traces how tax professionals discovered and marketed the loophole, the IRS's efforts to shut it down, and the political and legal battles that followed, highlighting the blurred line between tax avoidance and evasion.
Summarized by Podsumo
The Malta loophole exploited a provision in the 2008 US-Malta tax treaty that exempted retirement accounts from double taxation, allowing wealthy Americans to deposit highly appreciated assets like stocks, real estate, and Bitcoin into Maltese retirement accounts and withdraw the proceeds tax-free.
IRS lawyer Carolyn Schenk discovered the scheme in 2021 and successfully got it added to the IRS's 'Dirty Dozen' list of abusive tax schemes. The IRS then issued a proposed 'come clean' rule requiring users to disclose and pay taxes.
Secret recordings captured tax professionals, including future Treasury official Kenneth Keese, strategizing to fight the IRS closure, arguing that treaties are Congress's domain. Keese later became Acting IRS Chief Counsel under Trump but recused himself from Malta matters.
Over a billion dollars moved into these accounts, with one attorney estimating a single client had $100–300 million stashed. The IRS attempted to close the loophole in 2023 via a joint statement with Malta, but the final rule was never enacted and appears 'dead on the vine.'
"This was an incredibly abusive scheme. We got to put this out there because it seems legitimate. We think taxpayers are going to get pulled into this."
"I think I was oscillating between a woe and WTF."
"Nothing is certain except death and taxes was true. Now I'm not so sure about the taxes thing."