The Secret Tax Haven That The IRS Is Trying To Crack Down On

Puerto Rico, an American territory in the Caribbean, has been offering tax incentives to a variety of people, especially high-income earners, hedge fund managers, and cryptocurrency traders, since 2012. Among these tax incentives are legal ways to avoid paying federal income tax and other types of taxes. However, these tax breaks have come under increased scrutiny in recent months as the criminal investigation arm of the IRS, the IRS-CI, has initiated criminal and civil investigations into these practices.

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Puerto Rican Tax Incentives & Residency Claims

Individuals and businesses who utilize tax incentives in Puerto Rico receive a variety of benefits:

  • Avoidance of federal income tax
  • No taxes on dividend, interest, or capital gains income
  • Tax exemptions on earnings and profits for businesses
  • A small tax of just 4% for businesses using export services

    To qualify for these incentives, individuals must meet Puerto Rican residency requirements. They must be able to demonstrate a “closer connection” to Puerto Rico than to the United States. The incentives and conditions are not dissimilar to those of the Virgin Islands and other US territories.

    At the core of these Puerto Rican tax incentives is Form 8898, which is a crucial form that establishes or terminates residency. Individuals must provide details about their time spent living in Puerto Rico, where their vehicles are located, income sources, voter registration, and other pieces of information that can be used to determine whether the applicant is a bona fide resident of Puerto Rico. Due to the complexity of this form and its associated proofs, individuals who wish to apply are generally recommended to seek legal advice and maintain meticulous records.

    Controversy Surrounding These Incentives

    Although Puerto Rico has so far provided legal ways to avoid paying income tax and other incentives, the situation is not without scrutiny. Investigation into potential abuse of these incentives is ongoing, as IRS agents in tandem with US prosecutors use a variety of methods to examine the situation, such as deploying undercover agents and examination of records. Specifically, some agents are investigating the residency requirements and question whether some individuals may have misrepresented how much time they live in Puerto Rico or the source of their income.

    In addition to those who have taken advantage of these tax incentives, authorities are also investigating attorneys, accountants, and others who have promoted or facilitated participation. The IRS has multiple pending cases that may soon result in criminal charges.

    Taxpayers Reminded To Follow Tax Laws

    Since January 2021, the IRS-CI has been expanding its investigation into individuals who may have falsely reported their US-based income as Puerto Rican income to evade taxes. Taxpayers must be aware of their tax obligations, understand the risks of evasion or non-compliance, maintain accurate records, and provide truthful information regarding their income and taxation. Seeking professional legal advice is recommended for anyone who has offshore accounts lives abroad, or has been involved in any international business ventures.
    Individuals and businesses who wish to maintain their financial stability and integrity must utilize Puerto Rico’s tax incentives appropriately and responsibly. Advice from an experienced Arizona tax attorney can be essential for taxpayers who wish to protect their interests and avoid unintentional complications in the continually changing field of tax law.

    Arizona’s Leading Tax Attorney Firm Is Ready To Help You

    If you have offshore accounts, are facing a tax controversy regarding your international business, or are facing scrutiny from the IRS, don’t try to face the situation alone. Call the trusted Arizona tax lawyers at Silver Law, PLC. Our attorneys use their comprehensive knowledge of tax law, experience as former IRS employees, and negotiation skills to provide aggressive representation for all of our clients. We will fight to protect your rights and interests while providing trusted legal advice. Contact our office today to schedule your free, confidential consultation and discuss your case.

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