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UPDATE: Criminal Investigation Of Malta Pensions Heats Up As IRS Issues Flurry Of Summonses

As reported in our last news alert, the IRS is moving aggressively to investigate Malta Pension Plans. This is after naming Malta Pension Plans to the IRS’s Dirty Dozen (its annual list of abusive transactions), issuing a Competent Authority Arrangement walking back the tax benefits otherwise allowed under the U.S.-Malta Income Tax Treaty, and issuing proposed regulations that would make Malta Pension Plans Listed Transactions.

IRS Criminal Investigation (“IRS CI”) is now issuing administrative summonses to taxpayers, attorneys, accountants, and promoters involved with Malta Pension Plans. The summonses seek testimony and records from the summonsed parties regarding their involvement with Malta Pension Plans. Under section 7602 of the Internal Revenue Code (IRC), the IRS may “examine any books, paper, records or other data” that may be relevant to determine or collect tax due, and issue an administrative summons to compel a taxpayer or third party to produce such documents or testimony. If a summonsed party fails to comply, the IRS can move to enforce the summons in U.S. District Court pursuant to IRC 7402(b) and 7604(a). If the court orders enforcement and the recipient still refuses to comply, the summonsed party can face civil or criminal contempt.

To obtain court enforcement of an administrative summons, the IRS must make a prima facie showing of what have become known as the Powell factors:

  • The summons relates to an investigation being conducted for a legitimate purpose.
  • The information summoned may be relevant to the investigation.
  • The information sought is not already within the CRS’s possession.
  • The IRS has complied with the administrative steps set forth in the IRC.

United States v. Powell, 379 U.S. 48, 58 (1964). If the IRS establishes these factors, the burden shifts to the party challenging the summons to set forth reasoning as to why the summons should not be enforced.

In summons enforcement matters, thorny issues of privilege can arise. While materials covered under the attorney-client communication privilege may not be discoverable, where and how to draw the line on privilege can raise difficult and complex questions as to whether the documents and communications at issue were made in connection with the provision of legal advice or non-privileged business advice. Individuals and organizations receiving these summonses will need to act strategically in order to properly assert and preserve any privilege defenses they may wish to put forth in a summons enforcement proceeding.

In January of 2023, the Supreme Court heard oral argument in In re Grand Jury, a landmark case regarding a Kostelanetz client’s assertion of the attorney-client privilege in connection with communications that purportedly contained both legal and business advice. The Kostelanetz client asserted the attorney-client privilege over communications between the client and the client’s prior lawyers in response to a grand jury subpoena issued by the Department of Justice to the prior law firm. The Supreme Court ultimately declined to take action in that case, leaving this area of the law murky.

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