The IRS Targets High-Income Puerto Rico Tax Residents

Residents of Puerto Rico Under IRS Audit Microscope

Residents of Puerto Rico and IRS Tax Audits

Recently, the Internal Revenue Service issued a press release detailing various types of investigations they intend to target for both civil and criminal enforcement. In continuing our recent summary on issues involving criminal investigations in general, and specifically the Malta Retirement Plan — which has become subject to both civil and criminal enforcement — the next important IRS enforcement protocol involves residents of Puerto Rico. There are very specific tax rules involving Puerto Rico since technically it is a ‘Territory’ and not a state. And, Taxpayers who can prove they are a Bona-Fide Residents of Puerto Rico, may be able to avoid certain taxes on income that would otherwise be sourced from the United States. As you can imagine, this can lead to some Taxpayers claiming they are Bona Fide residents of Puerto Rico, when they are not actually meeting the necessary requirements. Likewise, when this is coupled with Puerto Rico Act 60, it can lead to a very large tax gap for wealthy taxpayers who are avoiding US taxes by claiming residents in Puerto Rico.

High-Dollar Scheme in Puerto Rico

As provided by the IRS:

• • • “We recently identified about 100 high-income individuals claiming benefits in Puerto Rico without meeting the residence and source rules involving U.S. possessions. These wealthy individuals are attempting to avoid U.S. taxation on U.S. source income, and we expect many of these cases to proceed to criminal investigation.”

What Does This Means for U.S. Residents in Puerto Rico?

While it can be very alluring for high-income earners who are US persons to try to claim residency in Puerto Rico when they do not actually meet the requirements for doing so, it is important to understand the ramifications. The IRS can pursue these taxpayers and claim civil fraud, which has no statute of limitations. In addition, depending on the specific facts and circumstances of the noncompliance, the IRS can take the further position that the taxpayer is acting criminally, which can lead to an IRS Special Agent Investigation and possibly prosecution for tax crimes.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and/or 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.

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. 

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.