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IRS Targets Puerto Rico Act 60 with Criminal Tax Audits

Offshore Account Update

Posted on September 15, 2023 |

The Internal Revenue Service (IRS) is cracking down on U.S. taxpayers who move to Puerto Rico—and who move their businesses to Puerto Rico—in order to avoid federal tax liability. While Puerto Rico Act 60 (formerly Acts 20 and 22) allows individuals and businesses that reside in the U.S. territory to achieve substantial tax savings, the IRS is focusing on individuals and businesses that claim the benefits of Puerto Rico Act 60 without meeting the law’s requirements.

In many cases, these audits are criminal in nature. Under the Internal Revenue Code, the IRS can conduct criminal audits in cases involving suspected intentional tax evasion and tax fraud. If a U.S. taxpayer is accused of intentionally claiming the tax benefits of Puerto Rico residency despite being ineligible to do so, the IRS and U.S. Department of Justice (DOJ) can pursue criminal charges carrying the potential for substantial fines and federal prison time.

IRS Puerto Rico Act 60: Who Qualifies for Tax Benefits?

Puerto Rico Act 60 allows the island territory’s residents and businesses to avoid local tax liability while also sidestepping liability for U.S. federal income taxes. As a result, as written in a recent letter from Congress to the U.S. Government Accountability Office (GAO), “Puerto Rico has become a tax haven from the federal government,” and Puerto Rico’s tax laws “result[] in tax benefits that Americans could not obtain anywhere else in the world.”

This is by design. Puerto Rico Act 60 and its predecessor legislation were specifically intended to attract wealthy individuals and businesses to the territory. The hope was that these individuals and businesses would help support the local economy, and the tax breaks offered under the law would more than pay for themselves over time.

But, now the IRS is cracking down on individuals and businesses that claim Puerto Rico Act 60’s tax benefits and don’t qualify. These individuals and businesses fall into two main categories:

  • Those that do not qualify as Puerto Rico residents (and therefore are completely ineligible for the tax breaks afforded by Puerto Rico Act 60); and,
  • Those that claim the law’s tax benefits for non-qualifying income (i.e., income generated from performing services outside of Puerto Rico).

United States residents and businesses that have not completed the process of redomiciling in Puerto Rico remain subject to the Internal Revenue Code’s requirements. While there are a number of ways to establish residence, one of the most commonly used tests is whether a person resides in Puerto Rico more than 183 per year. Additionally, even if an individual or business has redomiciled in Puerto Rico, if the individual or business still generates income from services provided in the United States, then this income is still subject to federal income taxation.

The IRS is now paying close attention to each of these issues, and it is pursuing IRS criminal tax audits when warranted. Individuals and businesses targeted in these audits must be extremely careful to protect themselves, and this starts with engaging experienced legal counsel.

Request an Appointment with Boston Criminal Tax Attorney Kevin E. Thorn  

If you have questions or concerns related to the IRS’ crackdown on Puerto Rico tax exemption claims, we invite you to get in touch. To request a confidential consultation with IRS criminal tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group in Boston, call 617-692-2989 or tell us how we can reach you online today.

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