Claiming Residency in Puerto Rico May Spur More State-Based Tax Audits

Michael Sardar, JD, and Vishan Chaudhary

In 2021, the IRS announced an enforcement campaign targeting high-income U.S. citizens who were purportedly claiming tax exemptions through Puerto Rico's Act 22 and Act 20 (combined as Act 60 in 2019) without meeting the residency and income-sourcing requirements set forth in IRC section 937 (https://tinyurl.com/37thamav). According to the IRS, these taxpayers were taking advantage of a tax benefit intended for those who truly moved their residence to Puerto Rico without actually doing so. Over 2,300 individuals claimed Act 22 benefits between 2012 and 2019. IRS data shows that 647 of those beneficiaries paid a total of $557,978,112 in federal income taxes in the 5 years before their move to Puerto Rico (Report to Congress Pursuant to Pub. L. 116-93 Regarding Interaction of Certain Puerto Rico and U.S. Tax Laws, IRS, p. 5, https://tinyurl.com/mau5j642). This has continued to be an area of focus for the IRS, and tax professionals are seeing enforcement efforts, including audits and investigations, in this space.