For United States citizens, there's more appeal to the idea of living in Puerto Rico than just the beautiful beaches and tropic climate. There is the fact that U.S. citizens who live there can be exempt from paying U.S. taxes. However, a dramatic spike in those claiming Puerto Rico residency—and the resulting tax exemption—has caught the federal government's attention. In 2021, the Internal Revenue Service (IRS) began auditing those who have recently moved to Puerto Rico, and it is redoubling those efforts this year.
From 2012 to 2019, 647 people claimed they'd moved to the island—at a potential cost of more than half a billion ($558 million) in federal tax revenue. And Treasury Secretary Janet Yellen has estimated that taxpayers with Puerto Rican residence could amount to a $7 trillion gap in federal revenue within ten years.
IRS Presence in Puerto Rico
There are now reported 20 IRS agents on the island, and the IRS has begun sending out letters requesting information from taxpayers. When auditing these taxpayers, the IRS is focusing on two issues.
The first is if those who claim a federal tax exemption are “bona fide residents.” To be a bona fide resident, you must spend at least 183 days in Puerto Rico within one tax year (or 549 days within a three-year period); be in Puerto Rico more days than you are in the U.S., and have no significant connection to the U.S. (e.g., you can't be registered to vote in the U.S. or have a spouse or child living in the states).
The IRS is also taking a hard look at where the exempt income came from. Only income generated in Puerto Rico is exempt. Income created elsewhere is still subject to federal taxation.
Given the enormous loss the government is facing, those who have moved to the island need to be aware of these audits and take them very seriously. This is not an issue that will go away anytime soon.
Contact an Experienced Tax Attorney
That's why if you are facing an audit relating to a Puerto Rico move, contact an attorney specializing in tax law. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.