Are Puerto Ricans U.S. Citizens, What it Means for Tax Filing

Are You a U.S. Citizen if You Were Born in Puerto Rico?

What if You Were Born in Puerto Rico?

When a person is born in the United States, they are by default a U.S. citizen. Likewise, even if a person is born outside of the United States to U.S. citizen parents, they too are considered a U.S. citizen.

• • • But what about when a person is born in a territory of the United States?

It becomes more complicated in situations in which a person is born in a territory of the United States, such as Guam or Puerto Rico. For example, even if a person is born in Puerto Rico, they are still considered to be a U.S. citizen. And, since the taxpayer is considered a U.S. citizen, they are required to file U.S. tax returns unless they qualify to only have to file Puerto Rico tax returns — such as if they reside in Puerto Rico and all of their income is sourced in Puerto Rico. It can be quite a shock for taxpayers to learn that they are subject to U.S. tax on their worldwide income even though they were not technically born in the U.S., and may not possibly live in the United States. Let’s briefly review some of the basics involving US citizenship for taxpayers born in Puerto Rico.

8 U.S.C. 1402 (Persons born in Puerto Rico)

• • • “All persons born in Puerto Rico on or after April 11, 1899, and prior to January 13, 1941, subject to the jurisdiction of the United States, residing on January 13, 1941, in Puerto Rico or other territory over which the United States exercises rights of sovereignty and not citizens of the United States under any other Act, are declared to be citizens of the United States as of January 13, 1941. All persons born in Puerto Rico on or after January 13, 1941, and subject to the jurisdiction of the United States, are citizens of the United States at birth.”

If You Live in Puerto Rico

For taxpayers who live in Puerto Rico, if they have US-sourced income then they are still taxed on their worldwide income and have to file a Form 1040. For taxpayers who live in Puerto Rico but only earn Puerto Rico-sourced income they may be able to avoid having to file US tax returns if they do not have any US-sourced income. However, they may still have to file various international information reporting forms, such as the FBAR and Form 3520. Likewise, certain corporations/trusts formed in Puerto Rico or operating in Puerto Rico may be considered foreign which can impact the reporting on forms such as forms 5471 and 3520-A.

As provided by the IRS, Publication 570

• • • “If you have income from American Samoa, the CNMI, Guam, Puerto Rico, or the USVI, you may have to file a tax return with the tax department of that territory. Or you may have to file two annual tax returns, one with the territory’s tax department and the other with the IRS.”

If You Do Not Live in Puerto Rico

Taxpayers who are considered to be U.S. citizens because they were born in Puerto Rico, but do not live in Puerto Rico will presumably have to file a Form 1040 — but they may also have to file a Puerto Rico tax return if it turns out that they also have Puerto Rico sourced income. This is primarily because even if the person was born in Puerto Rico, if they do not live in Puerto Rico then they would not be considered a bona fide resident of PR and so they would have to file a Form 1040.

International Information Reporting (FBAR, FATCA, etc)

For U.S. Citizens living in Puerto Rico or who were born in Puerto Rico (even if they do not live in Puerto Rico now), since they are considered to be U.S. citizens, they are required to file certain international information reporting forms each year to report foreign assets such as foreign bank accounts, foreign corporations, foreign trusts, foreign investment accounts, etc. There are many nuances that taxpayers should be aware of when determining which forms they have to file. For example, Bank Accounts for example that are located in Puerto Rico are not considered to be foreign for reporting purposes, whereas a trust that is formed in Puerto Rico may be considered foreign.

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. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.