What to Know About IRS Puerto Rico Act 60 Criminal Tax Audits in 2023

Puerto Rico Act 60 allows qualifying individuals and businesses to avoid federal ordinary income and capital gains tax liability. Individuals and businesses must meet the Act’s Puerto Rico residency requirement in order to qualify, and they must only claim federal tax exemptions for qualifying income. Those who improperly claim Puerto Rico Act 60 tax benefits can expect to face scrutiny from the Internal Revenue Service (IRS)—including IRS criminal tax audits in many cases.

The IRS began paying attention to taxpayers who claimed exemptions under Puerto Rico Act 60 in 2021, and on July 14, 2023, the IRS announced that it had “recently identified about 100 high-income individuals claiming benefits in Puerto Rico without meeting the residence and source rules involving U.S. possessions.” As a result, it is continuing to target U.S. residents and businesses for tax evasion, and it is pursuing criminal charges when warranted.

When U.S. Taxpayers Can Face Criminal Tax Audits Under Puerto Rico Act 60

The federal tax evasion statute (26 U.S.C. Section 7201) allows for criminal prosecution of “[a]ny person who willfully attempts in any manner to evade or defeat any tax imposed by [the Internal Revenue Code].” This includes claiming exemptions from federal income tax liability under Puerto Rico Act 60 knowing that the Act’s exemptions don’t apply. This could be due to either:

• Failure to establish residency in Puerto Rico; or,
• Earning U.S.-sourced income that is not eligible for tax breaks under Puerto Rico Act 60.

Even if an individual or business has established residency in Puerto Rico (i.e., in the case of an individual by living in the island territory for more than 183 days per year), Puerto Rico Act 60 does not necessarily apply to all of the individual’s or business’ income from all sources. During criminal tax audits, the IRS is focusing on taxpayers’ Puerto Rico residency claims and the source(s) of their income. If a taxpayer has not established Puerto Rico residency, then the Act does not apply at all. If a taxpayer has established Puerto Rico, the taxpayer may still be at risk for criminal charges due to improperly claiming the Act’s tax benefits for U.S.-sourced (or foreign-sourced) income.

What Taxpayers Should Do When Facing IRS Puerto Rico Act 60 Criminal Tax Audits

For taxpayers targeted in IRS Puerto Rico Act 60 criminal tax audits, the first step toward avoiding unnecessary liability is engaging an IRS criminal tax attorney. Even if criminal charges are unwarranted, proving this to the IRS requires experienced legal representation. When evidence of criminal culpability exists, it takes skilled advocacy to convince the IRS not to move forward with seeking an indictment.

Discuss Your Situation with Virginia Criminal Tax Attorney Kevin E. Thorn

If you need to know more about how to respond to an IRS Puerto Rico Act 60 criminal tax audit, we encourage you to contact us promptly. To schedule a confidential consultation with Virginia tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 703-752-3752 or request an appointment online today.