According to The New York Times, “an individual affiliated with the Internal Revenue Service” has sent a letter to the U.S. Congress claiming that the Internal Revenue Service is making no progress in its investigation of Act 60 tax evaders.
Three years ago, the IRS announced its intention to track down people who use Act 60, a law allowing wealthy people who move to Puerto Rico to avoid paying taxes, to evade their tax responsibilities. Act 60 gives people new to Puerto Rico a 4% income tax rate, a 75% discount on property tax, and freedom from tax on capital gains. The law requires people who want to take advantage of it to live in Puerto Rico for half the year, to give $10,000 to a nonprofit, and to buy property in Puerto Rico. The object was to encourage wealthy people to move to Puerto Rico and to create jobs on the Island. Some leaders claim that Act 60 has provided the hoped-for benefits.
However, there are also many people who say that the beneficiaries of the law in some cases do not really live in Puerto Rico, create fake nonprofits for one another to invest in, and drive up housing costs without taking part in the local economy. The Times reported that the letter to Congress claimed fewer than half of the Act 60 registrants met the requirements for the law. The result may be thousands of tax evaders taking advantage of Act 60 for personal gain.
Congress has called on the IRS to look more closely at the beneficiaries.
The letter
The whistleblower letter said that in the three years that the IRS has been investigating the Act 60 taxpayers, they have audited just 20 and collected no back taxes. More than 5,000 people have registered with the Puerto Rican economic development agency to receive the tax breaks.
The concerns about Act 60 beneficiaries are not only about the question of whether these individuals actually live in Puerto Rico, as opposed to just owning homes that they use for Air BnB rentals. There is also the question of income sourcing and transfer payments. Questionable practices include having a company located in Puerto Rico transfer funds to a company based in a state for use of intellectual property, claiming that profits from a sale of an existing company came from Puerto Rico simply because the company’s owner moved to Puerto Rico before the sale, or creating a shell company in Puerto Rico to claim profits actually made in a state.
Several members of Congress, including Nydia Velazquez, Ritchie Torres, Alexandria Ocasio-Cortez, and Raul Grijalva, wrote to the Government Accountability Office asking for a report on Act 60. The GAO says that it will provide this report when they have staff available. The IRS says that the audits are ongoing.
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