How PR Act 60 (formerly 20/22) May Trigger a Tax Audit

Will Puerto Rico Act 60 Trigger a Tax Audit?

In recent years, more and more U.S. taxpayers are seeking to circumvent certain income taxes they are required to pay as a U.S. person taxed on their worldwide income, by relocating to Puerto Rico in conjunction with Puerto Rico Act 60 (formally acts 20/22). For taxpayers who qualify for PR Act 60, they may be able to avoid certain taxes on income sourced in Puerto Rico as well as limit certain capital gains on different assets that have increased in value. With the increase popularity of the PR Act 60 program, are government agencies seeking to crack down on this program. Previously, the Internal Revenue Service listed PR Act 60 as one of the international compliance programs and more recently, several members of Congress came together to request that the government increase enforcement of compliance for taxpayers seeking to avoid U.S. tax under act 60. Let’s look at some of the ways taxpayers may be subject to an audit.

2023 IRS Puerto Rico Act 60 Announcement 

• • • High-dollar scheme in Puerto Rico. We recently identified about 100 high-income individuals claiming benefits in Puerto Rico without meeting the residence and source rules involving U.S. possessions. These wealthy individuals are attempting to avoid U.S. taxation on U.S. source income, and we expect many of these cases to proceed to criminal investigation.

Non-Qualifying Income

First, not all income is excluded from tax under PR Act 60. Rather, only certain income is excludable and not entire categories of income can avoid the IRS. For example, a taxpayer may be able to limit capital gains tax on certain assets that increase in value once the taxpayer becomes qualified under PR act 60, but that does not give the taxpayer carte blanche to avoid already unrealized gains on assets purchased before moving to Puerto Rico. For more information about how this works, we have a separate article detailing how Puerto Rico Act 60 works.

Not a Bona Fide Resident

Some taxpayers are under the misimpression that qualifying for PR Act 60 similar to obtaining a Golden Visa, but it is not the same. More specifically, in order to qualify for PR Act 60 and as a Bona Fide Resident of Puerto Rico under the US tax code, taxpayer must reside a majority of the time in Puerto Rico — with only limited travel to the United States. The failure to meet these strict requirements would automatically disqualify the taxpayer from being a BFR in Puerto Rico and open up all of their income to becoming subject to U.S. tax.

FBAR

Even if a taxpayer qualifies for PR act 60, they are still considered a US person and therefore still required to file an FBAR to report their foreign accounts. It is important to note, that while accounts located in Puerto Rico may not be considered foreign accounts for FBAR reporting purposes — just because the taxpayer resides in Puerto Rico under PR Act 60 does not mean that they can avoid their FBAR filing requirement. Stated another way, simply qualifying for PR Act 60 does not eliminate that taxpayer’s requirement to file an annual F bar.

FATCA

FATCA is the Foreign Account Tax Compliance Act. For Taxpayers who qualify under PR Act 60 but who are still required to file a form 1040 because they have US sourced income or foreign sourced income are still required to file Form 8938 if the value of the foreign assets meets the threshold requirements. Technically, not all taxpayers who qualify for PR Act 60 may be required to file a Form 1040 but for those who do, they are still required to file form 8938 in order to comply with FATCA.

Potential Criminal Investigations as Well

The IRS is aware that some taxpayers are intentionally misusing PR act 60 to avoid tax on items such as cryptocurrency, when in fact the income is actually taxable. The IRS is pursuing these types of investigations and if they believe that the taxpayer acted willfully or with fraudulent intent, it may lead to a special agent investigation and ultimately criminal prosecution.

What did Member of Congress Request

• • • “We write to request that the Government Accountability Office (GAO) conduct an assessment of provisions relating to certain tax breaks provided to individuals and businesses in Puerto Rico under Puerto Rico’s Act 60 of 2019. Specifically, those provisions that exempt individuals from almost all local taxation on Puerto Rico-sourced income if they “reside” on the island for a majority of the year and make minimal economic contributions to the territory. We request that the GAO review these provisions because we are concerned that they have not benefited the people of Puerto Rico and may have led to significant tax avoidance by wealthy individuals “residing” on the island. Act 60 consolidated and updated prior tax breaks, including Act 20 and Act 22, which were enacted in 2012 with the goal of luring wealthy individuals and businesses from the States and foreign countries to Puerto Rico.

    • Since 2012, more than 5,000 Americans and 3,600 businesses have been eligible for incentives.1 In addition to allowing these individuals and businesses to avoid local taxes, Puerto Rico’s territorial status also exempts their Puerto Rico-sourced income from federal taxes. This results in tax benefits that Americans could not obtain anywhere else in the world. Although Act 60 does not prevent foreign individuals and businesses from establishing in Puerto Rico, individuals with previous residence in the U.S. represent the majority of beneficiaries. In other words, Puerto Rico has become a tax haven from the federal government. The territorial tax exemptions granted to those seeking to avoid Federal taxes stand in stark, unfavorable contrast with the treatment of long-time Puerto Ricans and most other individuals and corporate residents of the territory. For example, firms that provide minimum business investment and employment on the island pay a corporate tax of just four percent.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.