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IRS Criminal Investigation Targeting Puerto Rico Act 20/22/60 Participants

By Joel N. Crouch on July 19, 2023
On July 14th, the IRS released a thank you to the Inflation Reduction Act highlighting its improved service, plans for updating its technology and enforcement initiatives. The full release can be found HERE. The enforcement initiatives in the announcement focus on high-income filers including millionaires who don’t pay their tax or have unfiled tax returns and millionaires who are attempting to evade paying their taxes. The announcement referenced IRS CI investigation of taxpayers involved in the Malta Pension Plan that I discussed in a previous blog post.

In addition, the announcement said the IRS had “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”. Puerto Rico’s Act 20 and Act 22 provide generous tax incentives to U.S. companies and individuals who establish a bona fide residence in Puerto Rico. Under U.S. law, a bona fide resident of Puerto Rico is not subject to U.S. income taxes on income derived from sources within Puerto Rico. Bona fide residents of Puerto Rico are only subject to U.S. income taxes on income derived from sources outside of Puerto Rico. Due to concerns regarding potential abuses of Puerto Rico Act 2022, in January 2021 the IRS included Puerto Rico Act 2022 on its compliance campaigns and later that year added it to the IRS annual “Dirty Dozen” list.

Like the Malta Pension Plan cases, we expect the IRS to focus not only on the taxpayers who claimed the benefits Puerto Rico Act 2022 but also the professionals and promoters who assisted and advised taxpayers. That focus will include civil examinations, promoter investigations and criminal investigations. Advisors and taxpayers would be wise to consult with an experienced tax controversy attorney before talking with the IRS about any Puerto Rico Act 2022 transaction.

For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact me at jcrouch@meadowscollier.com.