Act 60 & the IRS: What US Taxpayers Must Know
A plain-English guide to residency rules, income sourcing, and audit red flags for Act 60 participants Puerto Rico’s Act 60 offers compelling tax incentives, but the IRS is watching closely. If you’ve relocated to Puerto Rico under this program, understanding the US tax implications is of utmost importance. Here’s what you need to know.What Is Act 60?
Act 60 (formerly Acts 20 and 22) is Puerto Rico’s umbrella incentives code, offering eligible residents a 0% tax rate on PR-source interest, dividends, and capital gains, and a flat 4% corporate rate for qualifying export services businesses. For high-income earners, the savings can be dramatic, but only if you meet the residency and income-sourcing requirements.The IRS Audit Spotlight: Residency
The IRS has intensified scrutiny of Act 60 participants, zeroing in on whether they truly qualify as bona fide PR residents. Auditors are requesting an extensive paper trail including calendars, flight records, passports, bank statements, utility bills, cell phone records, and real estate documents. The central question is the closer connection test – essentially, does your life’s center of gravity lie in Puerto Rico or the United States? Key factors examiners weigh include:- Where your spouse and minor children are located
- Whether your primary residence in PR is at least comparable to any US home you retain
- How many days you actually work inside the US
- Where your bank and investment accounts are held
- Social connections, club memberships, and recreational ties
- Whether your legal, tax, and financial documents reflect a PR address
- Possession of a PR driver’s license and voter registration
KEY RECOMMENDATION
Anyone spending fewer than 220 days per year in Puerto Rico, or whose spouse or minor children remain in the US, should obtain a formal residency tax opinion from a qualified US law firm. Having a home in the US isn’t automatically disqualifying — but your Puerto Rico ties must genuinely outweigh your stateside connections.US-Source Income Still Gets Taxed
One of the most common misconceptions is that moving to Puerto Rico eliminates all US tax exposure. It doesn’t. If you or your Act 60 company earns income while working in the US, that portion remains fully subject to US federal tax, and the IRS is actively pursuing these cases.Investing to Maximize the 0% Rate
The Individual Investor’s Decree provides a 0% rate on Puerto Rico-source investment income, but income sourcing rules determine whether you actually qualify for that rate.- Interest: Sourced to the location of the payor. Interest from US corporate bonds and US Treasuries is still subject to US tax. PR bonds and GNMA mortgage-backed securities qualify for the 0% rate.
- Dividends: Sourced to the payor’s location. Dividends from US or non-PR corporations remain taxable in the US. Dividends from PR companies qualify.
- Capital Gains: Sourced to the seller’s location, meaning gains realized while you’re a PR resident generally qualify. However, a bifurcation rule applies to assets held before your move, allocating a portion of the gain to your pre-PR holding period.
The 10-Year Bifurcation Rule
If you owned an asset before moving to Puerto Rico, capital gains on its sale are split proportionally between your US and PR holding periods. For example, if you held an asset for 22 years total and only 9 of those were spent in PR, roughly 60% of the gain would be subject to US tax. Critically, this bifurcation rule expires after 10 years of PR residency. Assets sold after that threshold are treated as entirely PR-source for capital gains purposes, unlocking the full 0% rate on federal tax, with PR tax generally capped at 5%.Bottom Line
Act 60 is a legitimate and powerful tax planning tool, but it demands genuine commitment to Puerto Rico residency and careful attention to income sourcing rules. The IRS is sophisticated, well-resourced, and actively auditing participants. Sloppy documentation or half-measures on residency can unravel years of tax planning in a single audit. Work with experienced US and PR tax counsel, keep meticulous records, and ensure your life actually reflects the Puerto Rico residency you’re claiming. The benefits are real, but so are the consequences of getting it wrong.DISCLAIMER
This blog is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional for guidance specific to your situation.Act 60 and the IRS
Act 60 and the IRS create important questions for U.S. taxpayers who move to Puerto Rico. Additionally, tax incentives do not remove every federal obligation. Residency, income source, and documentation can determine the final result.
What Is Puerto Rico Act 60?
Puerto Rico Act 60 offers incentives for qualifying residents and businesses. Moreover, the benefits depend on specific requirements. An international tax attorney can review how those rules interact with U.S. federal tax law.
IRS Audit Focus on Bona Fide Residency
The IRS may examine whether a taxpayer became a bona fide Puerto Rico resident. In addition, an IRS examination attorney can help organize the record.
Being Audited by the IRS
Clients should review deadlines and information requests early. They should also organize residency records before responding.
Documents That Support Puerto Rico Residency
Travel, home, family, business activity, and community ties can matter. Furthermore, records should reflect the taxpayer’s actual life. A tax controversy attorney can assess how those facts may appear during an examination.
U.S.-Source Income Still Subject to Federal Tax
Some U.S.-source income remains subject to federal tax. Additionally, source rules can be technical. A foreign income tax attorney can review the type of income and where the underlying activity occurs.
Planning for Capital Gains and Business Income
International tax planning should begin before major gains or business changes. Moreover, a tax planning attorney can model timing and structure. The plan must match real residency and business facts.
When to Seek International Tax and Audit Counsel
Clients should seek advice before a move, transaction, or IRS response. In addition, early review creates more options. OCP Tax Law coordinates International Tax, Tax Planning, and Tax Controversy when Act 60 issues overlap.
IRS Audit Attorney Support
An IRS audit attorney can help when the examination focuses on Puerto Rico residency or income source. The attorney can organize responses and protect procedural rights. Early involvement may also reduce inconsistent explanations across tax years.