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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.
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.
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.
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.
Jorge focuses on tax planning matters, tax controversy and tax policy. He represents individuals and businesses—including multinational corporations, high-net-worth individuals, and family offices, particularly from Latin America and Puerto Rico—on complex U.S. international tax matters. His practice includes advising on inbound structuring, cross-border planning, IRS examinations, and tax policy developments. Jorge’s experience spans both the public and private sectors. Prior to joining Procopio, Jorge worked at the U.S. Internal Revenue Service (IRS) Office of Associate Chief Counsel (International). Jorge drafted legal guidance, including the Global Intangible Low-Taxed Income (GILTI) regulations, and provided advice to the IRS, U.S. Department of the Treasury, and to U.S. taxpayers. Jorge also served as IRS detailee on U.S. House of Representatives Committee on Ways and Means, where he assisted with matters involving international tax (including Puerto Rico and the other territories), corporate tax, and the energy provisions in the Inflation Reduction Act of 2022.
Jorge focuses on tax planning matters, tax controversy and tax policy. He represents individuals and businesses—including multinational corporations, high-net-worth individuals, and family offices, particularly from Latin America and Puerto Rico—on complex U.S. international tax matters. His practice includes advising on inbound structuring, cross-border planning, IRS examinations, and tax policy developments. Jorge’s experience spans both the public and private sectors. Prior to joining Procopio, Jorge worked at the U.S. Internal Revenue Service (IRS) Office of Associate Chief Counsel (International). Jorge drafted legal guidance, including the Global Intangible Low-Taxed Income (GILTI) regulations, and provided advice to the IRS, U.S. Department of the Treasury, and to U.S. taxpayers. Jorge also served as IRS detailee on U.S. House of Representatives Committee on Ways and Means, where he assisted with matters involving international tax (including Puerto Rico and the other territories), corporate tax, and the energy provisions in the Inflation Reduction Act of 2022.
Pedro advises clients in international estate planning, international tax and cross-border mergers and acquisitions. He focuses on U.S. investment structures, cross-border transactions, tax treaty planning, withholding obligations and reporting compliance on international transactions. The leader of Procopio’s International Tax practice, Pedro brings his clients experience in assisting clients and closely held companies with cross-border transactions involving the U.S., Mexico and other Latin American countries. He is a frequent speaker on international tax topics and recent tax developments affecting cross-border investments from and into Latin America.
Pedro advises clients in international estate planning, international tax and cross-border mergers and acquisitions. He focuses on U.S. investment structures, cross-border transactions, tax treaty planning, withholding obligations and reporting compliance on international transactions. The leader of Procopio’s International Tax practice, Pedro brings his clients experience in assisting clients and closely held companies with cross-border transactions involving the U.S., Mexico and other Latin American countries. He is a frequent speaker on international tax topics and recent tax developments affecting cross-border investments from and into Latin America.
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