by TYLER DURDEN
Last month we noted how hedge fund managers have been descending on Puerto Rico in the hopes of dodging Biden tax hikes, and to take advantage of tax incentives rolled out in 2012 which have lured high net-worth individuals, corporations and cryptocurrency traders alike.
If you fall under any of the above and you’re falsely claiming to be a resident of Puerto Rico, the IRS has a message for you:Â ‘We’re waiting for you…’
According to Bloomberg Tax, the agency has been the focus of a “sweeping” review to examine individuals who took advantages of the tax incentives. According to the report, “More than 4,000 mainland U.S. residents and firms have moved to the territory between 2012 and 2019, revealing potentially hundreds of millions of dollars in lost tax revenue to the U.S. government, according to an IRS report delivered to Congress.”
At issue are taxpayers who may have excluded income subject to U.S. tax, or failed to file and report income altogether when they moved to Puerto Rico, according to the IRS notice. The agency is also targeting those who claim to be bona fide residents of Puerto Rico but may be âerroneously reportingâ U.S. income to evade taxes.
The IRSâs push is taking place as Bidenâs proposed tax increases have triggered moves by Americaâs wealthiest from high-tax states like New York and California, while hedge funds like Izzy Englanderâs Millennium Management and ExodusPoint Capital Management have moved to establish subsidiaries on the island. An ExodusPoint spokesman declined to comment, while a representative for Millennium did not respond. -Bloomberg Tax
Tax attorneys who advise HNW clients on Puerto Rican tax incentives are already reporting that they’ve received requests for information from the IRS, while more audits are expected now that the US tax filing deadline has passed.
“The IRS doesnât start a campaign and not follow through,” said international tax layer J. Clark Armitage. “There are going to be a lot of audits.”
The Puerto Rico crackdown is part of a wider sweep by the Treasury Department, which estimated that wealthy taxpayers are hiding billions of dollars in income. According to Treasury Secretary Janet Yellen, the tax gap between what’s owed and what’s collected could grow to $7 trillion over the next decade if nothing is done.
“One of the purposes of a campaign is to stop whatever fraud is going on while youâre doing the investigations and audits,” said former IRS commissioner John Koskinen. “You like to stop people in their tracks.”
Campaigns by the IRS often take years to organize, as agents begin to detect factual patterns that indicate a significant loss of revenue due to non-compliance. In the case of Puerto Rico, much of the focus will be on establishing whether individuals are truly island residents and whether they properly sourced income to Puerto Rico.
Unlike previous IRS efforts, the campaignâs origins began in Congress after lawmakers requested a report from the agency in their 2020 appropriations bill over concerns Puerto Ricoâs tax laws may be enabling tax avoidance and that federal and state governments were being shorted revenue.
âEvery revenue authority everywhere is facing the same issue of needing to find an efficient process when there are fewer resources and budget constraints,â said Sharon Katz-Pearlman, global head of dispute resolution and controversy for KPMG.
The IRSâ report to Congress calculated that more than 1,924 applicantsâcorporations, LLCs, partnerships, and other typesâhad been granted tax benefits under the Exports Services Act (formerly known as Act 20) as of March 2020 based on partial information provided by Puerto Rico. Act 20 offers entities a 4% corporate rate on business income and 100% tax exemption on dividends. That provision along with the Individual Investors Act have now been consolidated into a new incentive law to attract individuals and investments to the island.
Read the rest of the report here.