The Uncertain Future of Tax Enforcement

This message comes from Edward Jones, where they believe rich is about taking care of what gives your life meaning. That's why your financial advisor personalizes your plan to help you preserve your progress and create something that lasts. Let's find your rich. Edward Jones, member SIPC This is Planet Money from NPR People go to incredible lengths to pay the smallest amount of taxes Sometimes in legal ways Sometimes in less than legal ways, in the shadows And it's not always clear which is which Figuring that out That used to be the job of Carolyn Shank. She spent nearly two decades at the IRS And she says the way the IRS uncovered the newest, hottest tax crimes ran the game it. surveillance, wiretaps, old school trash pools, which is obviously a phenomenal source of information. Yeah. Kind of dirty, but you know, could be very I' shocked y'all still do that. That's incredible. Then of course, there are the times when people reach out to them and say, I've got information. I'd like to whistle blow. We've seen people come forward and sit with, you know, in a dark room or a bag on their head and they've gone through the most intricate banking details. Have you been in one of those interviews? Not with a bag over my head She says the bag thing is just a term of our Sometimes though, people are afraid to talk even anonymously Carolyn says one time, after a long day at a conference, she got to her hotel room and someone shoved and I'm not sure how they even did it because it was so thick. An enormous manila envelope with a whole bunch of bank documents in it underneath my hotel room door, which is totally unnerving because How did they know that I was staying? Exactly. She says she changed rooms and the documents They turned into a case. Can you say any more details about it No, other than I was extremely freaked out And I also was thinking to myself, you know, what if this thing got shoved And stuck. L they should have put it in two different envelopes, right? Yeah. comeome on guys. Right. The case I wanted to talk with Carolyn about came from a much less dramatic tip. And it really paints a picture of how hard it is to draw a clear line between what is okay and What is not when it comes to taxes? Carolyn first heard about this questionable tax move in twenty twenty one. She was at a meeting with another top IRS lawyer He just said there's this weird thing out there that I think taxpayers are doing This maybe is the new thing. What do you think about it? And I said, whereere is it? And he said, Malta. And I said, what Yes, Malta tiny island nation in the middle of the Mediterranean, known for amazing beaches, and apparently, an attractive tax arrangement with the US that was helping Americans avoid paying piles and piles of taxes. I think I was oscillating between OWoe and WTF Hello and welcome to Pl of Money. I'm M Founton here with Lauren Lauricio, reporter over at the nonprofit tax reporting outlet, Tax Nes. Lauren, hi. Hi. how are you? Well, thanks. Normally the world of Tax can be kind of dry and procedural. But Lauren, I have this theory about you, and that's that you have this deadpan matter of fact way about you that somehow gets tax lawyers to open up and spill all of their dirtiest secrets. What do you think about that theory? I think you're wrong. Really? No, I think you're probably right Im just a tax nerd, I can't help. All right, well, today, how do the rich avoid taxes? We try to trace how a loophole is born and how it dies and is maybe put on life support You might call this a tale of attack shelter, an anatomy of an avoidance. The life cycle of a loophole And you have secret recordings. I do. O There is a litany of reasons why the IRS is going to lose. if they had any brains, they would be stopping right now going back there Support for NPR and the following message come from Rippling. These days, you can chat with AI about almost any business problem, but Rippling AI is designed to actually solve them. That's because Rippling AI is built on your live global workforce data, so it doesn't just uncover insights into your business, it uses them to take complex actions across your departments Ready for AI that isn't all talk Head to rippling. Ai slash money and get AI that turns insight into action. That's R IPP L I NG. Ai slash money. Sign up today Hey, it's Mike Danworth, execive producer of Wight Waight, Don't Tell. Here's great way to get the perks of being an NPR producer without doing any of the work. Join NPR plus. With NPR pllus, you get extended interviews, inside looks at your favorite shows, and more all while supporting NPR and never having to pull an all nighter, or if you work on one of the news shows an All Morninger Sign up at plus. npr. org To be clear It is perfectly fine and reasonable and understandable to want to pay as little in taxes as possible When you do that legally, we call it tax avoidance This story is about the mushy area between tax avoidance and doing illegal things to avoid taxes, tax evasion And it turns out the line between those two things is not hard and fast. It's ever changing and contested peoplee and the government are constantly pushing it back and forth It's a battlefield Because it is a battlefield People don't love to talk openly about their tactics. I've made many calls for this story where people say I would want to talk to you, but my lawyer says Don't do it. Welcome to my life. Yes One person who Lauren, you suggested, might agree to go on the record and try to help us understand how the wealthy move their money around to pay fewer taxes is Andrew Gradman. Andrew is a tax lawyer and he's looked into the malta loophole And what we wanted to learn from Andrew in particular was how exactly these loopholes came into existence, in particular, how this loophole, having to do with malta came to be. Like where did this all start? Who discovered it You're asking the human story about who thought of it and then you know, what kind of a bath were they thinking of when they said Eureka, whichich is pleasant. That's exactly what I'm looking for. Yeah, tellell me about the bath Andrew says we cannot definitively figure out who this came from We have some clues as to where it came from It all started because of a treaty with Malta US Malta tax treaty of two thousand eight. And boy, treaties are complicated. Yeah, I did not know this before working on the story, but Lauren, you taught me we have tax treaties with many countries. In alphabetical order, Armenia, Australia, Austria, Azerbaijan, Bangladesh. All, I'm gonna to stop you there. There are dozens of them. moreore than fifty. And the general idea is The US is unique. We tax our citizens income even when they live outside of the US We generally do not like to tax their income that has already been taxed by the country they're living in. So we create treaties, like the one with Malta, which say, among other things, if Malta has already taxed this, we won't. and vice versa. It's like a prenup, but for taxes. And this treaty with Malta, it left a few key details up for interpretation Yes In particular, details about how each country would tax retirement accounts. The context here is that when the US and Malta were drafting this treaty, there was this relatively new retirement account in the US called the Roth IRA Boths you might remember from the haze of trying to figure out retirement options allow you to put your already tax money into an account, let it grow, and then when you reach a certain age, you can take it out tax free whichich Andrew says is all fine and good until an American moves to some other country and that country wants to tax what's supposed to be tax free. We didn't have a system that would protect the U.S. worker. moves to a foreign country, takes the money out to retire, expecting it'll be tax free, but finds that the foreign country, under the treaty, has the right to tax it for some other reason. So, the drafters of that tax treaty with Malta put in language that says If a US retirement account is going to be tax exempt, then Malta will also exempt it from taxes and vice versa. Yeah, And this ended up being very important because a few years later Malta created their own wroth like retirement accounts to help their citizens save more money. Right. And these accounts were much more lucrative than the American ones Because in the US, the amount of money you can put into ROSs is capped. It's actually pretty small If you have assets like stocks or real estate or fancy paintings that have gone up a lot in value, you can't put those in. You have to sell them first and pay taxes on the gains these maltese accounts were way supercharged. They allowed people to put in unlimited amounts and not just cash, but whatever. Real estate, ownership of a company, Bitcoin. Then sell it and pull out the proceeds entirely tax free startarting when people hit fifty years old And because of the US's tax treaty with Malta, it seemed like the US. would need to abide by those rules too. which means Theory If Americans stashed their appreciated assets in these Maltese accounts sold them and took the proceeds back to the US. The IRS couldn't tax them So if you are a tax lawyer trying to figure out how to help your favorite client avoid paying capital gains taxes on her Google stock, you'd have hit the jackpot This was an enormous loophole just sitting there for the using and seemingly legit. You might be tempted to yell about it from the rooftops. Now, that's not something that people actually do because if they're loud about it, the government might come and close the loophole. Maybe they don't yell it from the rooftops, but they do pitch their wealthy clients then It is rare for normies like me to see those pitches, but Lauren, you actually got your hands on one of them I did It's a pitch deck put together by people selling this loophole idea that was passed around behind closed doors. Yeah, I got some of those materials. How did you get your hands on that? Someone shared it with me What's the pitch So the ultra wealthy. Okay. Um This one's from Dominion Fiduciary Services, which is like an international money manager. And this is its sales pitch for Americans to use the loopholle The Pitch lays out how lucrative one of these maltese accounts could be for different kinds of people. Like for example, they talk about this made up person, Max Franklin, a venture capitalist at a boutique private equity firm in New York owns a chunk of a company that's about to be sold for fifteen million dollars profit. So the materials say he would have to pay federal and New York tax on the gain of approximately four point seven to five million dollars The bottom line is that he would quote, really prefer to have the full amount available for his retirement. Luckily, the pitch goes on If Max hires the right people is a way for him to avoid this. Because of Malta's amazing retirement laws, if he just puts a chunk of the company into Malta's retirement account, when the company is sold, the proceeds will land in his account tax free And when he hits fifty, he can start getting his money out. also tax free without ever setting foot in Malta because of our amazing tax treaty with Malta. Andrew says, unlike a lot of loopholes, this one actually had an air of legitimacy. peopleeople started to advertise it publicly in law journals saying yeah, we know this looks too good to be true. But whether it was a mistake or not, it's right there in the treaty. Unlike some of these other loopholely type things, the authors and people really believed in it. I think it's really important to emphasize. The public might look at this and say there's something really shady and creepy about this I think the fact that they published public articles about this meant they really believed in it and that they were not trying to hide anything It seems like they also knew this might not last for long Like there was a ticking clock Talking about this publicly meant the IRS would see it and take a good hard look.axs loophole is a wasting asset. If you really believe that this was a mistake that was made, Th then you know it has a limited. And so you have to figure out how do I squeeze the juice out of it as much as possible And squeeze they did. Yeah, my sources say hundreds of taxpayers use the loophole And they estimate billions of dollars went into these accounts. One attorney told my colleague that his client had between one hundred and three hundred million dollars stashed away in Malta. And when those taxpayers put that money in there, nobody was giving them any trouble. This didn't happen until the next chapter of the story the crackdown. Right. This next part is about the moment that line between legit loophole and illegitimate tax shelter comes into focus These tax professionals have been pushing on one side of that way. Now the government is going to start pushing back from the other side brings us back to Carolyn. the lawyer who spent nearly two decades at the IRS. In twenty twenty one, she says, the IRS was soliciting from their staff candidates for this list they put together every year, where they call out tax schemes that people should be very wary of Do this at your own risk because it might come back to bite you It's called the Dirty Doen list I mean, I guess it sounds a lot sexier than it probably is. But it's literally like a laundry list of all of these abusive schemes. Everyone at the IRS is duking it out to get their favorite tax scheme on the list. Carlyn is digging into the malta thing. I called up my friends, the lovely agents at the offshore compomplliance Initiative group And these are awesome crack agents. I mean, they scraped a lot of the data that we already had. They did a deep dive to any mention of it on the internet, on YouTube, on any of these videos, on of these websites We also floated it around to some of the private practitioners at the time. That means tax lawyers? Tax lawyers, rightight. said, Hey, have you heard of this? And they more or less confirmed that they were aware of this and aware of, you know, clients that were doing this you know, we seem to be the only ones who weren't invited to this party. And she says, One way the IRS figures out if something is legit or not is whether there's any economic logic to it other than avoiding taxes There's a technical term for this that holds up in tax court the economic substance doctrine. What is the real purpose of this? Like, is there a business reason a person or a company might need a maltese account? Does this make economic sense other than purpose of doing a turn and burn on the asset and then sheltering the gain? it does not. Yeah, it did not. So she nominated it for that year's dirty Dozen list, Aguing that putting your highly appreciated assets into a Malteses retirement account like Imaginary Max Franklin sticking his chunk of a company in there is a tax shenanigan, a move that ultimately denies the American government and people the money they're due My pitch was This is 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 We need to get the word out there. this has gota go. In twenty twenty one, the IRS makes its first big public announcement that it's aware of the Malta loophole and skeptical It sends out a big press release saying Putting appreciated assets into Maltiese retirement accounts in order to avoid taxes is Probably sketchy. We're looking into it and officially adding it to the dirty dozen. Is that a huge day for you? Just walk into the office with a lot of bravado I gotem. Droppp the list. Bom I mean it was a shot across the bow to those promoters out there like, hey We see you, you know? But then also the taxpayer is like, hey, we got you. like don't do this Dirty doesn't activated Industry put on notice The loophole was still out there They needed to figure out a way to truly close it And it turned out that inside of the treaty, there contained a little important Baxy's clause which said basically, if there's something that's not clearly defined in the treaty, We can come back to it. And so In late twenty twenty one, the IRS and Maltese officials met and clarified something. Oh by the way, when the treaty said the U.S. would honor the terms of these Maltese retirement accounts for Americans Dn't? mean that Americans could put in highly appreciated assets They meant they could deposit their already tax cash, just like in the US In other words, no real estate, no Bitcoin no chunks of companies. And just like that, less than a year after Carolyn first learned about the loophole, the IRS was able to clarify a previously mushy mouth area of tax law It was awesome I mean, the flash to bang is pretty fast, right? I mean, There was a very short period of time that transpired here. And then all of a sudden we're standing here with our treaty partner right next to us standing in a joint statement This was a scary time for people who did this malta thing and the whole cottage industry that encouraged them to do it Because the government had sort of shifted that line between legitimate and illegitimate They said You cannot use that loophole And actually, You maybe never could So like the wealthiest Americans always do, they said, okay, we won't Nof course they didn't do that. Their lawyers and advisers started to meet to strategize on how they were gonna fight back against the IRS and protect their loophole. After the break, we hear someone who is now one of the most powerful tax officials in President Trump's administration On tape, leading the charge to protect the Malta tax loophole You've got all these very wealthy people with millions, even billions of dollars in these maltese retirement accounts But now the IRS is telling them No, you can't be putting your chunks of companies or any appreciated assets in there. Just because the IRS says, uh doesn't necessarily make it so As much as they want to draw a clear line between legit loopholes and illegitimate tax shelters, Sometimes People fight back. Especially people with a lot at stake. Right. So that's where the story goes next. tax lawyers and wealth managers and peddlers of these maltese retirement accounts. to organize In early twenty twenty two, they had their first meeting It was a video call. So many people have you got on the call? Someone recorded it and I ended up with a copy.. Now, in these tapes you're hearing, nobody's saying anything illegal. They're not a gotcha kind of recording What's extraordinary about them is that we don't usually get to hear how the wealthiest Americans or the tax professionals who help them push to pay less in taxes In these tapes, you hear how malleable that line between legal loophole and not so legal tax shelter really is. On the call, they introduced this high powered lobbyist, Kenneth Kees if not the major lobbyists in Washington, D.C. So at that Ken, I'm turning the program over to you Okay, so let me Cenkeys today has some very important jobs at the Treasury Department and the IRS The government told us in a statement that Mr. Keys never lobbied on behalf of the multip pension issues. In the recordings, you hear him walking people on the call through some of the possible strategies to defend the Malta loophole. He's hoping to get Congress involved because in his telling The IRS should not be allowed to modify the American tax Treaty with Malta becausecause you were able to fect Bully Malt into signing this document, it doesn't make what it says accurate or correct He argues treaties are the domain of Congress, so the IRS overstepped. Their changes don't count andit If you want to change the Malta treaty. You have to follow process essentially laid out in the Constitution. He talks about the senators he hopes to get on their side. Ram Paul potentially is a good candidate for us to talk to. because this is the kind of thing that would just drive him crazy. They're also basically talking about delay tactics. if you get one senator, who decides He's going to be outraged about this He can bring the whole place to a dead stop For some things in tax, If you can make it past the Statute of Limitations You can sleep easy. over twenty members of the Senate Foreign Relations Committee We probably need to win one. This group holds several meetings. I've listened to hours and hours of them talking. and at times, they sound pretty confident that they're going to get their way In twenty twenty three, the IRS really goes on the offense about this. They propose a rule We'll call it the come clean role. which says if you or someone you advise stashed your appreciated assets into Malti's account You gott to come tell us. Come clean, pay what you o up And if you don't We can penalize you And there's an important political context here This is under the Biden administration And the IRS has all this extra money for enforcement coming in from the Inflation Reduction Act Yeah, they're hiring tons of people. The wind is at Carolyn's back She thinks this rule has a great chance of making it officially into the federal register as a finalized rule. I thought for sure, hey, we are going to finally be able to round out some of these issues. In twenty twenty three, according to reporting by tax notes and others The IRS even issued criminal summonsons to gather more information on who was using these retirement accounts and who was telling them was okay Carolyn wouldn't go into specifics, but she says they have very powerful tools. They can go to the promoters of these schemes and say, tellell me who your clients were Who hired you to set up a Maltese retirement account? Or they go to parcel delivery companies like say, FedEx and give them a list of tax professionals they're looking at and ask who have these people sent documents to goal is to identify The John Doe. And so by getting their address like, boom, that's awesome in the middle of this big push to close up this loophole few things happen Donald Trump was elected president Do cleared out a bunch of IRS staff And that guy you heard on the calls describing the industry's defense of these maltese retirement accounts, Kenneth Keys He got to Huge jobs in the administration. Assistant Secretary of the Treasury and acting IRS Chief Counsel. Meaning Keys became the head of all tax policy and tax enforcement in the country. We reached out several times over several weeks to the Treasury and the IRS asking for an interview with Keys didn't give us one They gave us a statement saying Assistant Secretary Kees has recused himself from all matters related to malta pension plans in his capacity at Treasury and the IRS Caron, if it isn't obvious, is no longer on the case She does not work for the government anymore Like a quarter of the IRS' staff, she left when Doge was gutting the agency After twenty years of working there, she took early retirement Did you have more work to do on the multa thing? U I did. I think that Um I mean, there were There were other things to do And mter Um, Meanwhile, we don't know what's going to happen with that come clean regulation of the IRS, the one that would force everyone who did this thing to reveal themselves. What is the status of this rule As far as I know, the The regulation did not become final. I think it died on the vine think att this point I don't even know where it is. It's I think it's nowhere. I think it's nowhere. Which means that effort to make Stark the line between legit loophole and illegitimate tax shelter, which started back in twenty twenty one has so far not succeeded Carolya now works for a big fancy law firm So she's on the other side of things, defending clients against the IRS. Nothing to do with Malta, though ur law firm does have clients who are involved in the ma thing, and it was among many firms that joined those strategizing calls That was long before Carolyn's time, and she has recused herself from any malta cases Since she's refused from the cases and is outside of government now, Carolyn can't really say what's happening with the government's efforts to close the malle loo All we know is that they haven't publicly moved on it for a while How do you feel about that Well, I think the government missed an opportunity to to not only you protect the treasury and the fisk, but also to help tax fayers from you know, either getting put into these schemes or being convinced to be put into these gemes. So it's disappointing Did you say the fisk? Is that how you say fiscal situation of the US? Like protecting the bank account of the gov. I mean, right? Like America's checking account, right Before I worked on this story and Maybe this is naive I kind of assumed that tax law was pretty black and white