The Internal Revenue Service (IRS) is using its historic underfunding to explain why it has failed to pursue high-asset Americans taking unlawful advantage of tax breaks in Puerto Rico.
The United States has long worked to boost the economic circumstances of Puerto Rico. As a territory of the U.S., the island enjoys some rights and protections, but not others. To boost development, the U.S. enacted legislation to create tax incentives for those purchasing or investing in real property. According to PwC, the tax breaks provide complete exemption from local income tax, under certain circumstances, for American citizens who move to Puerto Rico to live. Enrollment on a public registry is required and tax breaks apply only to those who report their income.
According to an article in The New York Times, there are questions about some unintended outcomes of the tax breaks. The island has become a haven for wealthy (and not-so-wealthy) crypto-traders taking advantage of the preferential tax condition. Locals are rapidly being priced out of communities as investors arrive with checkbooks in hand. The affordable housing stock is quickly being purchased and flipped for rentals. Business is booming, but may not be sustainable.
Eligibility for the tax savings requires residency. Investment profits are tax-exempt only while the investor is living in Puerto Rico. That said, a common scenario involves an investor who becomes a resident a decade or more after a property purchase. The property is sold and tax exemption is taken on the full tenure of ownership, rather than years of actual residency.
While some have been charged with tax fraud and evasion, some say the IRS is lagging on enforcement in Puerto Rico. In November 2023, 12 members of Congress sent a letter to the IRS regarding tax evasion on the part of wealthy Americans. Legislators wrote, “The tax haven that Act 22 has created in Puerto Rico has proliferated the use of short-term rentals, increased cash property sales and market speculation, and caused displacement for the Puerto Rican people themselves.”
Despite being aware of the tax evasion, and chided by legislators, the IRS has been sluggish in pursing this apparently widespread offshore tax fraud. The IRS has announced a campaign to pursue those who have taken advantage of the tax breaks of Act 22 who are unable to meet the requirements of the legislation—but we’ll see.
If you took a few tax breaks too many in Puerto Rico—it is worth a call to your tax attorney to better understand your options and the potential consequences at this point.
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If you are concerned about business compliance, an offshore tax question, or need guidance with an IRS audit, Robert J. Fedor, Esq., LLC can help. We deliver seasoned, strategic tax guidance. Call us at 440-250-9709 or contact us online.
