US Tax of Puerto Rico Income, Accounts & Assets: IRS Offshore

Born in Puerto Rico and Paying US Taxes (What to Know)

Born in Puerto Rico and Paying US Taxes

When it comes to US taxes, Puerto Rico is a bit of an anomaly. On the one hand, being born in Puerto Rico means the person is a US citizen — and as a US citizen has to pay US tax on their worldwide income. But, not all tax rules apply to Puerto Rico the same as they do to the United States, and the definition of a United States Person may or may not include Puerto Rico — depending on the specific code section and application of the law. Moreover, if a person lives in Puerto Rico and earns income in Puerto Rico then that income may be exempt from US tax, although it is still taxed in Puerto Rico. Let’s look at the basics of what happens when a person is born in Puerto Rico from a US tax perspective.

Born in Puerto Rico Means You are a US Citizen

The most important aspect of being born in Puerto Rico from the US tax perspective is that you are considered a US citizen. As a US citizen, that means that you are taxed on your worldwide income. There are certain exceptions, exclusions, and limitations depending on the source of the income and whether it was sourced in Puerto Rico or not – but from a baseline perspective, a Taxpayer is considered a US citizen if they were born in Puerto Rico — which means you are taxed on your global income.

Born in Puerto Rico and Living in a Foreign Country

If you were born in Puerto Rico and reside in a foreign country, you are still considered a US person. Therefore, even if you reside outside of the United States and all of your income is sourced from outside of the United States, the income is still taxable in the United States because you are a US person. This is a very common misconception we see often, especially for taxpayers who have never lived on the mainland and have no US-sourced income.

Reside in Puerto Rico and Income Sourced in Puerto Rico

When a person resides in Puerto Rico and they have an income source from Puerto Rico, they may qualify to be able to exclude their Puerto Rico source income from the US tax return. There are various requirements that the taxpayer must meet in order to accomplish this feat though. In addition, it only relates to Puerto Rico-sourced income and therefore if a taxpayer has an income source outside of Puerto Rico, it would still be taxable by the US government.

FBAR and FATCA

From a reporting standpoint, a person born in Puerto Rico is considered a US citizen and therefore is subject to foreign bank and financial account reporting –– as well as the foreign asset disclosure rules. Two of the main form the taxpayer may have to file is the FBAR and Form 8938. It is important to note, that accounts located in Puerto Rico are not considered foreign. Therefore, if a person resides in Puerto Rico and only has accounts in Puerto Rico, then this generally would not require the filing of either the FBAR or Form 8938.

Foreign Trusts

Since Puerto Rico is not technically a state, depending on how the term US person is defined for different code sections or impact disclosure requirements of various international assets. For example, if a trust is located in Puerto Rico it is considered a Foreign Trust and would require form 3520/3520-A.

Form 5471

Corporations formed in Puerto Rico can also be considered foreign corporations – depending on the residence of the shareholder. Therefore, it may result in a taxpayer having to file Form 5471 to report an ownership interest in a foreign corporation. Complicating the matters even further, depending on the level of ownership by US persons may result in the corporation being considered a controlled foreign corporation – – which can lead to further complications involving Subpart F Income and GILTI.

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 that specializes exclusively in these types of offshore disclosure matters.

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