The IRS/DOJ Target Puerto Rico Tax Shelters – PR Act 60 Risks

Civil & Criminal PR Act 60 Audits and Investigations Intensify

The IRS/DOJ Target Puerto Rico Tax Shelters – PR Act 60 Risks

Puerto Rico Act 60 (formerly Acts 20/22) was developed by the territory of Puerto Rico to facilitate investment into the Puerto Rico economy. Technically, Puerto Rico is not a state but rather a territory, and therefore, it operates differently from the states. With PR Act 60, some taxpayers can relocate to Puerto Rico and, under Puerto Rico law, can avoid having to source their income as U.S.-sourced income, but rather as Puerto Rico-sourced income. As a result, that income would not be taxable in the United States because it is Puerto Rico-sourced income for taxpayers living in Puerto Rico. Most taxpayers who take advantage of this opportunity are wealthy taxpayers seeking to shelter and eliminate U.S. taxes on certain investment income. And of course, these types of schemes tend to invite unwanted scrutiny from the U.S. government — which has recently culminated in several investigative and enforcement actions, including subpoenaing large U.S. law firms to obtain information regarding the advice that they are giving to determine whether it is valid or not. Let’s take a brief look at the inherent risks of PR Act 60.

Do You Really Qualify for PR Act 60?

Qualifying for PR Act 60 is more difficult than it may seem. It is intended to bring businesses into Puerto Rico, and for the businesses that qualify, they can reduce and eliminate most taxes. There are alternative opportunities for individual investors, but applicants must meet the very strict residency and other requirements of the law. The US government is concerned that most taxpayers who qualify are not actually living and residing in Puerto Rico full-time — and even if they are, they are manipulating their income sourcing rules to artificially reduce their tax liability.

The IRS Can Challenge Your Position

Remember, just because a taxpayer qualifies under a Puerto Rico tax law does not mean the U.S. government has to accept the position. If the U.S. government determines that either the law is not valid or the taxpayer’s income should be considered sourced in the United States and not Puerto Rico specifically, then they may become subject to taxes, fines, and penalties.

IRS Civil Fines and Penalties

Civil enforcement does not include potential incarceration, but the penalties can be stiff. The US government alleges that many taxpayers are manipulating their income so that they have significantly underreported their income as foreign income instead of US-sourced income. In addition, many taxpayers are taking positions on filing international information reporting forms, such as 5471 and 3520/3520-A, that the US government disagrees with. This could ultimately result in significant fines and penalties.

DOJ/IRS Criminal Enforcement

If the US government believes that the taxpayers are willfully seeking to artificially reduce their tax liability by improper means, such as falsely relying on PR Act 60 or manipulating the facts to make it appear that they qualify when they do not, it could lead to both civil and criminal investigations. If the DOJ and IRS pursue a criminal investigation against the taxpayer, it may result in a conviction, which could result in incarceration in addition to a significant amount of back taxes, fines, and penalties.

Look Before You Leap

Taxpayers should be very cautious before deciding to jump in and move to Puerto Rico under PRX 60 with the intent of avoiding U.S. tax.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures, which is typically the preferred program of the two streamlined procedures. That is because under this program, Taxpayers can file original returns, and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income, but they do not go through one of the approved offshore disclosure programs. This is illegal, and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

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.