The leaked tapes that show how the rich avoid taxes

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 Schenck. She spent nearly two decades at the IRS. And she says the way the IRS uncovered the newest, hottest tax crimes ran the gamut. Surveillance, wiretaps, old school trash pools, which is obviously a phenomenal source of information. Yeah. Kind of dirty, but, you know, could be very fruitful. I'm 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 whistleblow. We've seen people come forward and sit with, you know, an attorney and say, I'd like to whistleblow. 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 art. 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. 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, there 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 a Maltese retirement account, when the company is sold, the proceeds will land in his account tax-free. And when he hits 50, 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. So people 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 loophole-y 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. But 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. But 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. A tax loophole is a wasting asset. If you really believe that this was a mistake that was made, then you know it has a limited life. Huh. And so you have to. 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 $100 and $300 million stashed away in Malta. And when those taxpayers put that money in there, nobody was giving them any trouble. That 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 line. Now the government is going to start pushing back from the other side. Which brings us back to Carolyn, the lawyer who spent nearly two decades at the IRS. In 2021, 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. Like, do this at your own risk. Because it might. It might come back to bite you. It's called the Dirty Dozen 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. And Carolyn is digging into the Malta thing. I called up my friends, the lovely agents at the Offshore Compliance Initiative group. And these are awesome crack agents. I mean, they scraped a lot of. 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 any of these websites. We also floated it around to some of the private practitioners at the time. That means tax lawyers? Tax lawyers, right. 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, 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 the 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. That year's dirty dozen list. Arguing that putting your highly appreciated assets into a Maltese 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 is got to go. In 2021, the IRS. 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 Maltese 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. We got them. I just dropped the list. Boom. 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 taxpayers like, hey, we got you. Like, don't do this. Yeah. Dirty dozen activated. Industry put on notice. But 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 take back seize 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 2021, the IRS and Maltese officials met and clarified something. They said, oh, by the way, when the treaty said the U.S. would honor the terms of these Maltese retirement accounts for Americans, it didn't mean that Americans could put in highly appreciated assets. They meant they could deposit their already taxed cash, just like in the U.S. 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 Maltese retirement accounts, the U.S. said, oh, by the way, when the treaty said the U.S. And just like that, less than a year after Carolyn first learned about the Maltese retirement accounts for Americans, it didn't mean that Americans could put in highly appreciated assets. On the call, they introduced this high-powered lobbyist, Kenneth Keyes. Kenneth Keyes is one of the top, if not the major, tax lobbyists in Washington, D.C. So with that, Ken, I'm sending the program over to you. Okay, so let me. Ken Keyes today has some very important jobs at the Treasury Department and the IRS. The government told us in a statement that Mr. Keyes never lobbied on behalf of the Malta pension issues. But 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. Just because. You were able to affect bully Malta 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. And if you want to change the Malta treaty, you have to follow the process that is essentially laid out in the Constitution. He talks about the senators he hopes to get on their side. Rand Paul potentially is a good candidate for us to talk to. 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. and make it past the statute of limitations, you can sleep easy. Over 20 members of the Senate Foreign Relations Committee. We probably only 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. But in 2023, the IRS really goes on the offense about this. They propose a rule. We'll call it the come clean rule, which says if you or someone you advise stashed your appreciated assets into a Maltese account, you got to come tell us. Come clean, pay what you owe. 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 2023, according to reporting by Tax Notes and others, the IRS even issued criminal summonses to gather more information on who was using these retirement accounts and who was telling them it was OK. 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, tell 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? The goal is to identify the John Doe. And so by getting their address, like, boom, that's awesome. But in the middle of this big push to close up this loophole, a few things happened. Donald Trump was elected president. Doge 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 Keyes? He got two huge jobs in the administration. Assistant Secretary of the Treasury and Acting IRS Chief Counsel, meaning Keyes 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 Keyes. They didn't give us one. But they gave us a statement saying, Assistant Secretary Keyes has recused himself from all matters related to Malta pension plans in his capacity at Treasury. And the IRS. Carolyn, 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's staff, she left when Doge was gutting the agency. After 20 years of working there, she took early retirement. Did you have more work to do on the Malta thing? I did. I think that. I'm trying to figure out how to answer this. Yeah. I mean, there were there were other things to do on Malta. Yeah. Meanwhile, we don't know what's going to happen with that come clean regulation at 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. You think at this point, I don't even know where it is. It's. 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 2021, has so far not succeeded. Carolyn 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. Her law firm does have clients who are involved in the Malta thing. And it was among many firms that joined those strategizing calls. But that was long before Carolyn's time. And she has recused herself. Since she's recused 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 Malta loophole. 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 protect the Treasury and the FISC, but also to help taxpayers from. You know, either getting put into the law. Or being put into these schemes or being convinced to be put into these schemes. So it's disappointing. Did you say the FISC? Is that how you say the fiscal situation of the U.S.? 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. Like the IRS says something is off limits. And you get caught. You got to pay. Their word wins. I did not know that you could just fight back against the feds. Tell them that off limits line that you're so sure of. You're wrong. And that you could maybe win. In other words, I thought the Ben Franklin maxim, nothing is certain except death and taxes, was true. Now I'm not so sure about the taxes thing. If you are in the mood for more planet money in your life, and I know you are, I have a suggestion for you. It is free. It is the Indicator newsletter with fun insights about the economy every week in your inbox. You can subscribe to it at npr.org slash Indicator newsletter. You will not regret it. Lauren, an extra special thanks to you for bringing us this story. And who else at Tax Notes should we thank for helping with this story? Tax Notes legal reporter Chandra Wallace and the editorial staff. Thank you. Their website is taxnotes.com. This episode of Planet Money was produced by Luis Gallo with help from Emma Peasley. It was edited by Marianne McCune. It was fact-checked by Sierra Juarez, engineered by Sina Lefredo and Robert Rodriguez. Alex Goldmark is Planet Money's executive producer. I'm Nick Fountain. I'm Lauren Luricchio. This is NPR. Thank you for listening.