U.S. prosecutors and IRS agents are deploying undercover agents and closely examining records to build criminal and civil cases against wealthy individuals suspected of illegally taking advantage of tax breaks offered by Puerto Rico.
The cash-strapped island used eye-popping incentives to lure hedge fund managers, cryptocurrency traders and other Americans to the U.S. territory over the last decade. But investigators are now focusing on whether people lied about how much time they spend on the island and the source of their income, according to people familiar with the matter.
U.S. officials are also looking at the promoters, attorneys and accountants who marketed the tax program, one of the people familiar with the probes said. At least two criminal investigations, including one involving a U.S. lawyer, could result in charges soon, said the people, who asked not to be identified because the probes aren't public.
Prosecutors are weighing conspiracy and wire fraud charges, according to a speaker at a New York conference last month who recounted a phone call with a federal prosecutor who had been to San Juan.
"He said, 'Look, we're here, we are looking to make cases,"' said the speaker, attorney
"The message is the noose is tightening," Ortiz said after recounting the conversation.
The controversial tax breaks are designed to bring wealthy Americans to a U.S. territory fresh out of bankruptcy and where more than 40% of residents live in
5,000 Americans
Since 2012, more than 5,000 Americans have qualified for incentives that allow them to legally avoid paying federal income tax and no taxes at all on dividend, interest and capital gains income. Another 3,600 businesses avoid taxes on dividends from earnings and profits, and pay 4% tax on export services.
But lawyers familiar with the program said the residency requirements are rigorous and tempt people to cheat. To qualify, people must stay on the island at least 183 days a year. They also must show they have a "closer connection" to Puerto Rico than the U.S., and that the island is their "tax home."
Internal Revenue Service investigations may start with a taxpayer's
Questions include: How many days were you present in the territory and the U.S.? Where was your principal permanent home? Where was your automobile located? Where were you registered to vote? Where did you derive the majority of your income?
Any new cases would be the first since Gabriel F. Hernandez, an accountant at BDO Puerto Rico, was
The IRS said in a statement that it investigates potential criminal violations when warranted. The Justice Department declined to comment.
Residency investigations are not new to wealthy people with multiple homes. Tax authorities in New York City, New York state and California have long sought to determine where people should be paying taxes.
The potential savings in Puerto Rico have drawn hundreds of crypto investors like Michael Terpin, who came several years ago.
"I didn't want to pay capital gains tax to the IRS on my Bitcoin," Terpin
In an interview, Terpin said: "I've been told that every single person is going to get audited, and that's fine. I keep incredibly precise notes. I get them run past both a tax lawyer and a CPA, and I've got two bookkeepers. So bring it on, I'm not afraid of an audit."
Puerto Rico attorneys like
"In practical terms, they have to have feet on the ground," Mendez said. "They have to have a home available to them at all times. They can't just stay in hotels or lease out a home when they're here."
The IRS Large Business and International Division announced a
The program is also under attack from local residents who believe that wealthy Americans are driving up real estate prices and paying far less in taxes than native Puerto Ricans. Amid sporadic protests against the wave of low-tax "colonizers," local legislation is pending that would overhaul the incentives.
'Time of crisis'
"It has been 10 years since the law was approved and we want to know what has it resulted in," said Marlyn Goyco-Garcia, the national organizing manager for the Center for Popular Democracy, which has been lobbying to have the incentives modified or eliminated. "Especially in this time of crisis where everyone is paying more for electricity, health, education."
Popular Democracy is pressing the IRS for information on the investigations and Goyco-Garcia said the agency offered to provide more details in August.
Terpin, however, says the tax breaks have lured world class money managers and entrepreneurs to the territory.
"For some reason, that's seen as a bad thing by some people," he said.
The program began with the Puerto Rican Export Services Act, or Act 20, and the Individual Investors Act, or Act 22. They were consolidated in 2020 through Act 60, which required exempt businesses to generate $3 million in revenue and employ at least one Puerto Rican resident. Individuals must buy a home on the island and donate at least $10,000 a year to charities.
Private equity investor
The case of Hernandez, the indicted accountant, "raised awareness of potential risks associated with non-compliance and highlighted the importance of adhering to the legal requirements and maintaining accurate documentation," according to the 20/22 society spokesman.
That kind of information is critical during audits, said tax attorney Mark Leeds, who has represented 30 clients relocating to Puerto Rico over the past decade.
"If they're making $1 million or more, they should expect to be audited," Leeds said. "If an audit comes, they want to have their presence locked down with a diary. I tell them to buy something every day with a credit card. Of course, these days cell and GPS tracking can also be used to determine an individual's whereabouts."
