IRS Intensifies Scrutiny of Puerto Rico Tax Residency Claims Under Act 60
IRS Intensifies Scrutiny of Puerto Rico Tax Residency Claims Under Act 60
The U.S. Internal Revenue Service (IRS) is sharpening its focus on taxpayers who claim residency in Puerto Rico under Act 60 (formerly Act 22). The program was designed to attract investment by offering generous tax incentives to bona fide residents. For qualifying individuals, capital gains, dividends, and certain types of passive income may be subject to little or no federal taxation. While the law has drawn high-net-worth individuals and entrepreneurs to the island, it has also raised concerns in Washington about potential abuse.
A High-Profile Case of Fraud
The risks of misrepresenting residency status were underscored by a recent case involving an investor who admitted to filing false documents to retroactively establish Puerto Rico residency. By doing so, he sought to avoid roughly $7 million in federal capital gains taxes. His scheme unraveled under federal investigation, and he pled guilty to tax fraud. He now faces up to three years in prison and an order to pay $15.3 million in restitution.
This case is significant not only because of the dollar amounts involved but also because it shows that federal prosecutors are prepared to pursue individuals aggressively. The attempt to backdate residency claims is exactly the kind of abuse the IRS has warned about, and the outcome will likely serve as a cautionary tale for others considering similar strategies.
What Counts as Bona Fide Residency
At the core of these cases is the definition of bona fide residency. To qualify, individuals must meet specific tests established by federal law, including physical presence on the island for at least 183 days each year, maintaining a primary tax home in Puerto Rico, and demonstrating closer personal and business ties to the island than to the mainland United States. Failing to meet these requirements can expose taxpayers to full U.S. federal tax liability, along with potential penalties for fraud if misstatements are made.
The IRS has previously issued guidance stressing that simply purchasing property in Puerto Rico or visiting occasionally does not satisfy the residency requirements. Individuals who attempt to stretch the rules are increasingly at risk as enforcement intensifies.
The recent guilty plea highlights a broader trend: the U.S. government is no longer treating Puerto Rico residency claims as a niche tax planning strategy. Instead, it is making clear that abuses will be investigated and prosecuted. Investors considering relocation to Puerto Rico must therefore ensure that they genuinely meet the residency tests and maintain proper documentation.
Conclusion
Puerto Rico continues to promote Act 60 as a tool for economic development, seeking to attract investment and encourage new business ventures. Yet these incentives must operate within the broader framework of U.S. federal tax law. The latest enforcement actions illustrate the tension between encouraging investment and preventing abuse.
About the Authors
Jorge M. Oben-Cuadros
Jorge advises clients on planning, controversy and litigation, and policy matters involving tax and trade. He represents multinational corporations, defense contractors, investment funds, high net worth individuals, and family offices, particularly from Latin America, Puerto Rico, and Europe, on complex U.S. and international matters. His practice focuses on inbound structuring into the United States, cross border planning, tariff exposure and mitigation, tax and trade litigation, and strategic guidance on tax and trade policy developments affecting global operations.
Jorge’s experience spans both the public and private sectors. Prior to joining Procopio, he served in the U.S. Internal Revenue Service Office of Associate Chief Counsel International, where he drafted significant published guidance, including the Global Intangible Low Taxed Income GILTI regulations under Section 951A, and advised the IRS, the U.S. Department of the Treasury, and taxpayers on complex international tax issues. He also served as an IRS detailee to the U.S. House of Representatives Committee on Ways and Means, where he worked on international and corporate tax legislation, matters involving Puerto Rico and the U.S. territories, trade related tax issues, and the energy provisions of the Inflation Reduction Act of 2022.
Jorge advises clients on planning, controversy and litigation, and policy matters involving tax and trade. He represents multinational corporations, defense contractors, investment funds, high net worth individuals, and family offices, particularly from Latin America, Puerto Rico, and Europe, on complex U.S. and international matters. His practice focuses on inbound structuring into the United States, cross border planning, tariff exposure and mitigation, tax and trade litigation, and strategic guidance on tax and trade policy developments affecting global operations.
Jorge’s experience spans both the public and private sectors. Prior to joining Procopio, he served in the U.S. Internal Revenue Service Office of Associate Chief Counsel International, where he drafted significant published guidance, including the Global Intangible Low Taxed Income GILTI regulations under Section 951A, and advised the IRS, the U.S. Department of the Treasury, and taxpayers on complex international tax issues. He also served as an IRS detailee to the U.S. House of Representatives Committee on Ways and Means, where he worked on international and corporate tax legislation, matters involving Puerto Rico and the U.S. territories, trade related tax issues, and the energy provisions of the Inflation Reduction Act of 2022.
Pedro E. Corona de la Fuente
Pedro is a trusted advisor to global families and privately held multinational companies on a range of investments and operations across borders. His practice bridges international tax, estate planning, and corporate structuring with a deep understanding of the global business and policy environment. He guides high-net-worth families with members of multiple nationalities, family offices, and privately held multinational enterprises in structuring their cross-border investments, optimizing tax efficiency, and preserving multigenerational wealth. He leads Procopio’s International Tax practice and the firm’s internal Corporate and Tax team.
With extensive experience across the U.S., Mexico, and Latin America, Pedro designs compliant and tax-efficient frameworks for wealth transfer, business succession, and international investment, ensuring alignment with both domestic and foreign legal systems. His work frequently involves advising on treaty interpretation, pre-immigration planning, expatriation, cross-jurisdictional entity governance, reporting obligations, and the tax implications of global mobility.
Pedro is a trusted advisor to global families and privately held multinational companies on a range of investments and operations across borders. His practice bridges international tax, estate planning, and corporate structuring with a deep understanding of the global business and policy environment. He guides high-net-worth families with members of multiple nationalities, family offices, and privately held multinational enterprises in structuring their cross-border investments, optimizing tax efficiency, and preserving multigenerational wealth. He leads Procopio’s International Tax practice and the firm’s internal Corporate and Tax team.
With extensive experience across the U.S., Mexico, and Latin America, Pedro designs compliant and tax-efficient frameworks for wealth transfer, business succession, and international investment, ensuring alignment with both domestic and foreign legal systems. His work frequently involves advising on treaty interpretation, pre-immigration planning, expatriation, cross-jurisdictional entity governance, reporting obligations, and the tax implications of global mobility.
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