IRS: Puerto Rico Act 60 Exemption Claims May Trigger Criminal Tax Audits

Posted in Offshore Account Update on September 15, 2023 | Share

Puerto Rico Act 60 allows qualifying individuals and businesses to avoid federal income tax for both ordinary income and capital gains. However, while this was precisely the purpose for which the Act (and its predecessors—Puerto Rico Acts 20 and 22) was established, the Internal Revenue Service (IRS) is now cracking down on U.S. taxpayers who use the Act to avoid federal tax liability. Crucially, the IRS is pursuing criminal inquiries in some cases, and these IRS criminal tax audits present risks for both substantial fines and prison time.

When Can Businesses and Individuals Face IRS Criminal Tax Audits Under Puerto Rico Act 60?

While Puerto Rico Act 60 is complex, it has two main eligibility criteria. To qualify for the Act’s tax benefits, U.S. taxpayers must establish residency in the island territory, and they must earn qualifying income. Until a taxpayer establishes Puerto Rico residency, the taxpayer remains subject to all applicable provisions of the Internal Revenue Code. Additionally, even if a taxpayer establishes Puerto Rico residency, if the taxpayer earns non-qualifying income (i.e., income from providing services outside of Puerto Rico), this income is still subject to federal income taxation.

In other words, Puerto Rico Act 60 applies to Puerto Rico residents’ Puerto Rico-sourced income. If either of the Act’s primary requirements remain unsatisfied, then the Internal Revenue Code applies.

With this in mind, the IRS is focusing on individuals who improperly claim Puerto Rico Act 60’s tax benefits. It has announced an enforcement campaign targeting Puerto Rico-related federal tax fraud—and, as noted above, it is pursuing criminal tax audits in many cases. The IRS is using these audits to target both individuals and businesses, with particular emphasis on traders, business owners and other high-net-worth individuals who have illegally underpaid their federal income tax liability.

What Are the Risks of Facing an IRS Criminal Tax Audit Involving Puerto Rico Act 60?

For individuals and businesses targeted in IRS criminal tax audits involving Puerto Rico Act 60, the risks are substantial. The federal tax evasion statute (26 U.S.C. Section 7201) imposes up to five years of federal imprisonment and a $100,000 fine for individuals and up to a $500,000 fine for corporations. This is in addition to liability for back taxes, interest and penalties owed. If an IRS audit leads to multiple charges and multiple counts, as will often be the case, this could potentially mean facing decades of prison time and millions of dollars in criminal penalty exposure.

As a result, U.S. and Puerto Rico residents who have concerns about facing criminal tax audits should take prompt action to protect themselves. This starts with engaging an experienced IRS criminal tax attorney to deal with the agency on their behalf.

Request an Appointment with Washington D.C. Criminal Tax Attorney Kevin E. Thorn

If you need to know more about defending against criminal tax evasion allegations related to Puerto Rico Act 60, we encourage you to contact us promptly. To request an appointment with Washington D.C. criminal tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 202-349-4033 or inquire online today.

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