IRS Audit Campaign: Puerto Rico Act 22

In late 2020, the Large Business and International Division of the United States Internal Revenue Service (the “IRS”) updated its list of active examination campaigns by adding taxpayers who have claimed benefits through Act 22 in Puerto Rico.

The aim of Puerto Rico Act 22 (recently consolidated into Puerto Rico Act 60), also known as the “Individual Investors Act,” is to attract affluent inhabitants to Puerto Rico by providing a broad income tax exemption for eligible income after establishing legal residence in the territory.

The following information regarding the active campaign is presented on the IRS website:
“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 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.”

Because the United States is one of the few nations that taxes its citizens on a world-wide basis, the Puerto Rico income tax exemptions of Act 22 are particularly appealing to U.S. citizens. If a United States citizen or resident establishes bona fide residency in Puerto Rico, IRC Section 933 can enable them to exclude from U.S. taxation certain income earned from Puerto Rico sources.

Tyler R. Hatcher, Special Agent in Charge of the IRS-CI Miami Field Office said, “Federal and Puerto Rican tax laws have been put in place to invigorate the economy and provide financial relief to Puerto Rico. IRS Criminal Investigation will vigorously pursue any individuals and professionals that fraudulently enrich themselves by abusing government tax incentive programs.”

The statement sends a clear message to United States persons who have relocated, or who are considering relocation, to Puerto Rico to take advantage of tax incentive programs that an IRS audit may be approaching. Taxpayers who have already relocated to Puerto Rico should consult with their tax advisers regarding their compliance with the residency rules or for assistance in case they are selected for audit. Others who may be considering moving to Puerto Rico to take advantage of Act 22, or its sister provision, Act 20 (designed to shelter business income of Puerto Rico companies which export goods or services) should likewise obtain solid tax planning advice to solidify their position when they are ready to claim Puerto Rico tax residency.

Contact international tax attorneys William L. Blum or Robert A. Ladislaw with any inquiries.