IRS Says it Has Identified 100 High Income People Claiming Residence in Zero Tax Domicile Puerto Rico

Puerto Rico is unique in the fact it is part of the United States yet residence do not pay any federal taxes. It is part of the concept of taxation without representation and Puerto Rico does not have any voting members in Congress. This fact, combined with a Caribbean climate, has made it home so some high net worth individuals. It is also popular with some of the very wealth crypto crowd.

Citing the recent funding from the Inflation Reduction Act, legislation that had little to do with inflation but did include a lot of government spending, the Internal Revenue Service (IRS) says the new funding has helped it pursue individuals that do not report their taxes.

As part of the notice, the IRS specifically mentioned Puerto Rico highlighting the following:

  • High-dollar scheme in Puerto Rico. We 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.

While Hunter Biden may have gotten off with a slap on the wrist, it seems that leadership at the IRS is revved up to pursue these high income individuals and send them to jail – if possible.

As part of the IRS’s strategic plan for 2023 to 2031, the agency aims to beef up its enforcement capabilities when it comes to crypto. The IRS states:

“For issues known to have high, ongoing risks of noncompliance or complexity, such as digital assets and listed transactions, we will prioritize resources to increase enforcement activities, including criminal investigation as appropriate. We will improve detection of emerging issues and gather feedback within the IRS to identify trends and risks. We will establish processes for responding to emerging issues more quickly with appropriate and tailored compliance treatments. For emerging issues, we will develop new treatments or adjust existing treatments accordingly.”

A recent article in Fortune claims that over 5000 crypto traders, hedge fund managers, and other US citizens have moved to Puerto Rico to benefit from the tax program but apparently, some are following short of the residency requirements.

If you are curious, the IRS has a bulletin on taxes and Puerto Rico which you may review here. Effectively, any income generated outside of Puerto Rico is still beholden to US taxes, and only Puerto Rican revenue is tax-free.

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