[Many thanks to David Lewis for bringing this item to our attention.] Donna Borak (Bloomberg News) reports on the U.S. Internal Revenue Service’s focus on private wealth clients, hedge fund managers, and cryptocurrency traders “fleeing to Puerto Rico for its huge tax breaks.”
Private wealth clients, hedge fund managers and cryptocurrency traders fleeing to Puerto Rico for its huge tax breaks—and to escape President Joe Biden’s proposed capital gains tax increases—are now the focus of a sweeping Internal Revenue Service review.
The country’s tax collector quietly launched a coordinated campaign in late January to examine individuals who took advantage, starting in 2012, of tax incentives designed to lure high net-worth individuals and corporations to Puerto Rico. More than 4,000 mainland U.S. residents and firms have moved to the territory between 2012 and 2019, revealing potentially hundreds of millions of dollars in lost tax revenue to the U.S. government, according to an IRS report delivered to Congress.
Individuals have already started receiving requests for information, according to tax attorneys that advise clients on federal income tax issues under Puerto Rican tax incentive laws. More audits are anticipated now that the U.S. tax filing deadline has passed.
“The IRS doesn’t start a campaign and not follow through,” said J. Clark Armitage, an international tax lawyer with Caplin & Drysdale. “There are going to be a lot of audits.”
At issue are taxpayers who may have excluded income subject to U.S. tax, or failed to file and report income altogether when they moved to Puerto Rico, according to the IRS notice. The agency is also targeting those who claim to be bona fide residents of Puerto Rico but may be “erroneously reporting” U.S. income to evade taxes. [. . .]
Campaigns by the IRS often take years to organize, as agents begin to detect factual patterns that indicate a significant loss of revenue due to non-compliance. In the case of Puerto Rico, much of the focus will be on establishing whether individuals are truly island residents and whether they properly sourced income to Puerto Rico.
Unlike previous IRS efforts, the campaign’s origins began in Congress after lawmakers requested a report from the agency in their 2020 appropriations bill over concerns Puerto Rico’s tax laws may be enabling tax avoidance and that federal and state governments were being shorted revenue. [. . .]