IRC 937 & PR Act 60 IRS Tax Compliance Audit Campaign

Puerto Rico Act 60 Taxpayer Audits for High Net Worth

IRC 937 & Puerto Rico Act 60 IRS Audit Compliance

High Net Worth Taxpayers & Puerto Rico Act 60 Tax Audits: Act 60 has been in the news recently for many reasons. First, some members of Congress have determined that they want to make Act 60 (which includes previous Acts 20 and 22) a key enforcement compliance priority. In addition, a few months back the Internal Revenue Service included Act 60 enforcement as one of the LB&I Compliance Campaigns that they plan on focusing on in 2021.  For US Person Taxpayers who relocated to Puerto Rico under Acts 20/22/60 — it is important that they have their ducks in a row — in case they become subject to audit.

What is Puerto Rico Act 60 (Formerly Acts 20/22)?

Puerto Rico is not technically a state within the United States, but rather it is a territory. It operates kinda sorta independently from the United States tax system. Due to the overall lagging economy in Puerto Rico (especially due to the recent natural disasters), the territory wanted to entice investment into their economy — and therefore developed Acts 20/22 — which were now combined with other acts into Act 60. The program is very popular with High Net Worth US Taxpayers.

Tax Benefits under Act 60

The US taxes individuals on worldwide income. If someone is a US Citizen for example but has income generated in Puerto Rico — then the baseline perspective is that the income is included on their US tax return. There are some exceptions, exclusions and limitations to the general US Worldwide Income tax rules, which can kick-in when a person resides in Puerto Rico full-time — and their income is sourced from Puerto Rico. Thus, with some crafty maneuvering and planning, a taxpayer could legitimately move to Puerto Rico, become a full-time resident in Puerto Rico, and significantly reduce — if not eliminate — their U.S. tax liability while maintaining their US Person status.

*There are some limitations for assets and investments that were owned previously before relocating to Puerto Rico.

Acts 20/22 were a good opportunity –and Act 60 is also good — although as with most Golden Visas Programs and their equivalents (PR is not technically a Golden Visa program because US persons can relocate there and take advantage of the tax benefits without formally expatriating) there are more stiff requirements now, including the requirement to purchase property within the first few years of obtaining residency, and increased investment requirements.

The IRS Does Not Like Act 60

The IRS does not believe US persons should be able to take advantage of this type of tax avoidance, and has decided to create an international compliance campaign and solely at the issue.

As provided by the IRS

• • • Practice Area:  Withholding, Exchange & International Individual Compliance

    • Lead Executive: Deborah Palacheck, Director, Withholding, Exchange & International Individual Compliance

    • Campaign Point of Contact:  Ursula Gee, Program Manager, Withholding, Exchange & International Individual Compliance

    • This campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 22, “Act to Promote the Relocation of Individual Investors to Puerto Rico”, without meeting the requirements of IRC Section 937, Residence and Source Rules Involving Possessions. As a result, these individuals may be excluding income subject to US tax on a filed US income tax return or failing to file and report income subject to US tax. 

    • This campaign will also address those individuals who have met the requirements of IRC Section 937 but may be erroneously reporting US source income as Puerto Rico source income in order to avoid US taxation.

    • The objective of this campaign is to address noncompliance in this area through a variety of treatment streams including examinations, outreach and soft letters.

26 USC 937

• • • (a) Bona fide resident

    • For purposes of this subpart, section 865(g)(3), section 876, section 881(b), paragraphs (2) and (3) of section 901(b), section 957(c), section 3401(a)(8)(C), and section 7654(a), except as provided in regulations, the term “bona fide resident” means a person—

      • (1) who is present for at least 183 days during the taxable year in Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands, as the case may be, and

      • (2) who does not have a tax home (determined under the principles of section 911(d)(3) without regard to the second sentence thereof) outside such specified possession during the taxable year and does not have a closer connection (determined under the principles of section 7701(b)(3)(B)(ii)) to the United States or a foreign country than to such specified possession. For purposes of paragraph (1), the determination as to whether a person is present for any day shall be made under the principles of section 7701(b).

    • (b) Source rules

    • Except as provided in regulations, for purposes of this title—

      • (1) except as provided in paragraph (2), rules similar to the rules for determining whether income is income from sources within the United States or is effectively connected with the conduct of a trade or business within the United States shall apply for purposes of determining whether income is from sources within a possession specified in subsection (a)(1) or effectively connected with the conduct of a trade or business within any such possession, and

      • (2) any income treated as income from sources within the United States or as effectively connected with the conduct of a trade or business within the United States shall not be treated as income from sources within any such possession or as effectively connected with the conduct of a trade or business within any such possession.

    • (c) Reporting requirement

      • (1) In general If, for any taxable year, an individual takes the position for United States income tax reporting purposes that the individual became, or ceases to be, a bona fide resident of a possession specified in subsection (a)(1), such individual shall file with the Secretary, at such time and in such manner as the Secretary may prescribe, notice of such position.

      • (2) Transition rule If, for any of an individual’s 3 taxable years ending before the individual’s first taxable year ending after the date of the enactment of this subsection, the individual took a position described in paragraph (1), the individual shall file with the Secretary, at such time and in such manner as the Secretary may prescribe, notice of such position.

Golding & Golding: International Tax Law Specialist Team

Golding & Golding specializes exclusively in IRS offshore and domestic voluntary disclosure and tax amnesty.

Contact our firm for assistance.