Because Puerto Rico offers substantial tax advantages, a new trend has begun: cryptocurrency traders, hedge-fund managers, and wealthy individuals have been exiting the mainland to Puerto Rico to avoid President Biden’s proposed increases on capital-gains tax. These changes are now the center of a broad-scale Internal Revenue Service review. According to tax attorneys who advise wealthy individuals, a coordinated campaign was launched quietly this past January by the IRS to scrutinize those taking advantage of tax incentives created to draw wealthy corporations and individuals to Puerto Rico. This pattern has been going on since 2012. According to an IRS report delivered to Congress, over 4,000 residents of the United States mainland, as well as certain companies, moved to the territory from 2012 to 2019. This resulted in the IRS losing millions of dollars in tax revenue.
Wealthy Individuals Now Receiving Inquiry Letters
Tax lawyers will likely be called upon to advise certain individuals who have now begun receiving inquiry letters from the IRS. International tax attorney J. Clark Armitage stated that the IRS does not begin a campaign and then fail to follow through. Therefore, many more filers can anticipate a tax audit. Tax planning is essential for virtually anyone, but now that the U.S. tax filing deadline has passed, wealthy taxpayers can expect to be questioned if they manipulated their personal finances or corporate strategies to take advantage of Puerto Rico’s tax laws. Those targeted include filers who may have omitted wages or income from investments that are subject to U.S. tax, or who simply failed to file after relocating to Puerto Rico, a move that could fall under the umbrella of tax evasion.
U.S. Treasury Department Conducts Crackdown
The aforementioned tax audits come amidst a broader crackdown by the U.S. Treasury Department. A report recently released by them indicated that rich taxpayers have been hiding billions of dollars in income. Janet Yellen, U.S. Secretary of the Treasury, stated that if this issue was not dealt with, it could result in the government losing as much as $7 trillion in tax revenue over the next 10 years.
According to cryptocurrency tax lawyers, it frequently takes years to organize an IRS campaign, and, in the case of taxpayers fleeing to Puerto Rico, the focus is centered on determining whether those individuals are truly residents of the island or not, as well as if their income is properly sourced to Puerto Rico as opposed to the mainland.
Unlike IRS efforts in the past, the origins of the campaign stemmed from a request from Congress for a report, in which lawmakers voiced concerns about the issue of state and federal governments being shorted on revenue due to corporations and individuals manipulating Puerto Rico’s tax laws to their advantage.
The Puerto Rico Trend Continues
That trend of moving to Puerto Rico for tax incentives has continued even during the pandemic, and the number of New York residents relocating to Puerto Rico has quadrupled compared to 2019. Between March 2020 and February 2021, approximately 82 requests for a permanent move to Puerto Rico were filed by Manhattan residents. The previous year, this number was only twenty-two. Tax lawyers who specialize in Puerto Rican tax incentives say they receive approximately five to 15 inquiries a day from those who wish to determine if they qualify for Puerto Rico’s tax incentives.
Many are day traders or cryptocurrency traders who do not have traditional jobs. Rather, they acquire wealth by making trades on cryptocurrencies, securities, stocks, and other commodities. In this way, they earn capital gains that are 100 percent tax exempt simply because of their location. Other filers who inquire include hedge-fund managers and investment bankers who either provide financial advice to clients or manage their funds, allowing them to enjoy carried interest that is tax exempt.
Proof of Residency Required
Individuals targeted by the IRS during this campaign must offer proof of their Puerto Rican residency, which is the only way to legally enjoy Puerto Rico’s tax benefits. Taxpayers must live on the island for at least 183 days each year to be regarded as a bona-fide resident.
Tax attorneys who advise United States taxpayers on the territory’s tax incentives say that being viewed as a bona-fide resident is very complicated: in the IRS’s eyes, maintaining a residency goes beyond merely leasing an apartment in a popular beach area. It includes transporting primary possessions, moving with a spouse and children, updating voter registration, enrolling children in school on the island, joining local clubs, and carrying out other actions that would indicate the move is permanent.
It is also recommended that such individuals minimize contact with the United States mainland. If the IRS completes an audit and examines the person’s life, they need to be convinced that Puerto Rico is actually where that person lives. Tax problems typically arise when individuals claiming to have moved cannot provide sufficient supporting evidence that they have truly relocated.
It is expected that the trend of relocating to Puerto Rico will continue, even as the IRS cracks down on this activity. Those who have completed all the steps properly do not have to worry. However, those who fear that tax penalties may be looming for skipping steps along the way, or for participating in any action that would be construed as tax evasion, may be targeted by the IRS. If this is the case, such individuals should contact a qualified tax attorney without delay.