The leaked tapes that show how the rich avoid taxes

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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 Shink. She spent nearly two decades at the IRS. And she says, "The way the IRS uncovered the newest hottest tax crimes ran the game at." Surveillance, liar taps, old-school trash pools, which is obviously a phenomenal source of information. Yeah. Kind of dirty, but, you know, could be very, uh, for shock. You 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 the 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 vanilla envelope with a whole bunch of bank documents in it, underneath my hotel room door,

which was totally unnerving, because, how did they know 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? Like, they should have put it in two different envelopes, right? Yeah, come 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 2021. 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, where 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 U.S. That was helping Americans avoid paying piles and piles of taxes. I think I was”

oscillating between a wo and WTF. Hello and welcome to play the money. I'm Nick Fountain here with Lauren Louricio reporter over at the nonprofit tax reporting outlet tax notes. Lauren, hi. Hi, how are you? Well, thanks. Normally the world of tax can be kind of dry and procedural, but Lauren, I have a theory about you. And that's that you have this dead-pan matter-facts way about you that somehow gets tax lawyers to open up and spill all of their dirtyest secrets. What do you

think about that theory? I think you're wrong. Really? No, I think you're probably right. I'm 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 it's maybe put on life support. You might call this a tale of a tax shelter and a anatomy of an avoidance. The life cycle of a loophole. And you

“have secret recordings. I do. There is a litany of reasons why the Irish is going to lose if they”

had any brains, they would be stuck around and gone mad. 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. People and the government are constantly pushing

it back and forth. It's a battlefield. And 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. But one person who Lauren,

move their money around to pay fewer taxes is Andrew Gradman. Andrew is a tax lawyer and he's

looked into the multi 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 multi 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, which is pleasant. It's exactly what I'm looking for. Yeah, tell me about the bath.

Andrew says we cannot definitively figure out who this came from. But we have some clues as to where it came from. It all started because of a treaty with Malta. The US Malta tax treaty of 2008. 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. I'm going to stop you there. There are dozens of them. More than 50. And the general idea is, the US is unique. We tax our citizens income even when they live outside of the US. But 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 prenote, 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. Roths, you might remember, from the Hays 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. Which 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 US worker who moves to a foreign country, takes the money out to retire, expecting that 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 Roth-like retirement accounts to help their citizen save more money. Right. And these accounts were much more lucrative than the American ones. Because in the US, the amount of money you could put into Roth is kept. It's actually pretty small. And 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. But these”

Malta's 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, starting when people hit 50 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, in theory, if Americans stashed their appreciated assets in these Malta's accounts, then sold them

and took the proceeds back to the US, the IRS couldn't tax them. So if you were 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. No, 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. And 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 to the ultra wealthy?”

Okay. Um, this one from Dominion Fiduciary Services, which is like an international money manager. And this is its sales pitch for Americans to use the loophole. Pitch lays out how lucrative one of these Malta's accounts could be for different kinds of people. Like, for example, they talk about this made up person, Max Franklin, venture capitalist at a boutique private equity

So the material, say he would have to pay federal and New York tax on the gain of approximately

$4.725 million. But 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 multi's 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. And

her 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

“loopholes 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 know 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. And so you 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 dollars 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 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 multi 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 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. I said, hey, have you heard of this? And they more or less confirmed that they were aware of this and aware of clients that were doing this. 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 multi account? Does this make economic sense other than the purpose of doing a turn and burn on the asset? And then sheltering the game, it does not. Yeah, it did not. So she nominated it for that year's dirty dozen list. Arguing that putting your highly appreciated assets into a multi's retirement account, like imaginary Max Franklin sticking his chunk of a company in there, is a tax phenomenon.

I move that ultimately denies the American government and people, the money they're doing.

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 pull into this. We need to get the word out there. This is this has got to go. In 2021, the IRS makes its first big public announcement that it's aware of the multiple and skeptical. It sends out a big press release saying, putting appreciated assets into multi's retirement accounts in order to avoid taxes.

Is probably sketchy. We're looking into it and officially adding it to the dirty dozen.

I got him 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, they're contained a little important”

take back these claws. What 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 it in highly appreciated assets. They meant they could deposit their already tax cash, just like in the U.S. In other words, no real estate, no Bitcoin, no chunks of

companies. And just like that, listen, 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 multi 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 could not use that

loophole. And actually, you may be never could. So like the wealthiest Americans always do,

they said, okay, we won't. Of course, they did do that. There's lawyers and advisors started to meet to strategize on how they were going to 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. So you've got all these very wealthy people with millions, even billions of dollars in these

Malta's 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. But just because the IRS says, um, 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 of stake. Right. So that's where the story goes next. The tax lawyers and wealth managers and peddlers of these

Malta's retirement accounts started to organize. And early 2022, they had their first meeting. It was a video call. So how many people have you got coming 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 gacha 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 introduce this high-powered lobbyist. Kenneth Keys. This is one of the top, if not the major tax lobbyist in Washington, DC. So with that, Ken, I'm threatening them program over you. Okay, so let me, Ken Keys 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 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 in deciding this document, it doesn't make what it says accurate or correct. The 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. Ram Paul potentially is a good candidate for us to talk to, because this is a kind of thing that would just drive him crazy. They're also basically talking about delay tactics.

place to a dead stop. For some things in tax, if you can make it past the statute of limitations,

you can sleep easy. When it over 20 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. 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, you're appreciated assets into Malta's 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 is 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 summons. It's a gather more information on who was using these retirement accounts and who was telling them it 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,

tell me who your clients were, who hired you to set up a Malta's 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 of 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,

Doe's cleared out a bunch of IRS staff, and that guy you heard on the calls describing the industry's defense of these Malta's retirement accounts, Kenneth Kees, he got two huge jobs in the administration. Assistant Secretary of the Treasury and acting IRS Chief Council,

meaning Kees 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 Kees. They didn't give us one. But 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 in 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

Doe's was getting 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. What else? Yeah. Meanwhile, we don't know what's going to happen with that com-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 regulation did not become final. I think it died on the vine.

At this point, I don't even know where it is. 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 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 from any Malta cases. 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 not only, you know, protect the Treasury and the Fisk, but also to help tax fares from, you know, either getting put into these schemes or being convinced it would be put into these schemes. So it's disappointing. Yeah. Did you say the Fisk? Is that how you say the Fisk goal situation should WS? Protecting the bank account of the Gulf? I mean, right? Like America's checking account, right? Before I worked on this story, and maybe this is naive,

off limits, and you get caught. You got to pay. They're word wins. I do 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 in 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”

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“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, Shonter Wallace, and the editorial staff. Thank you guys. Their website is taxnotes.com. This episode of Plata Money was produced by Luis Gio, with help from Emma Peasley. It was edited by Mary Ann McCune. It was back checked by Sierra Wattas, engineered by Cinalitor Frado, and Robert Rodriguez. Alex Goldmark is Plata Money's Executive Producer. I'm Nick Fountain. I'm Lauren Lurekiel.

This is NPR. Thank you for listening.