Ultrarich tax dodgers take advantage of loopholes, IRS is trying to crackdown but failing

Because Puerto Rico offers substantial tax advantages, a new trend has begun: cryptocurrency traders, hedge-fund managers, and wealthy individuals have been exiting the mainland to Puerto Rico to avoid President Biden’s proposed increases on capital-gains tax. These changes are now the center of a broad-scale Internal Revenue Service review. According to tax attorneys who advise wealthy individuals, a coordinated campaign was launched quietly this past January by the IRS to scrutinize those taking advantage of tax incentives created to draw wealthy corporations and individuals to Puerto Rico. This pattern has been going on since 2012. According to an IRS report delivered to Congress, over 4,000 residents of the United States mainland, as well as certain companies, moved to the territory from 2012 to 2019. This resulted in the IRS losing millions of dollars in tax revenue.

Wealthy Individuals Now Receiving Inquiry Letters

Tax lawyers will likely be called upon to advise certain individuals who have now begun receiving inquiry letters from the IRS. International tax attorney J. Clark Armitage stated that the IRS does not begin a campaign and then fail to follow through. Therefore, many more filers can anticipate a tax audit. Tax planning is essential for virtually anyone, but now that the U.S. tax filing deadline has passed, wealthy taxpayers can expect to be questioned if they manipulated their personal finances or corporate strategies to take advantage of Puerto Rico’s tax laws. Those targeted include filers who may have omitted wages or income from investments that are subject to U.S. tax, or who simply failed to file after relocating to Puerto Rico, a move that could fall under the umbrella of tax evasion.

U.S. Treasury Department Conducts Crackdown

The aforementioned tax audits come amidst a broader crackdown by the U.S. Treasury Department. A report recently released by them indicated that rich taxpayers have been hiding billions of dollars in income. Janet Yellen, U.S. Secretary of the Treasury, stated that if this issue was not dealt with, it could result in the government losing as much as $7 trillion in tax revenue over the next 10 years.

According to cryptocurrency tax lawyers, it frequently takes years to organize an IRS campaign, and, in the case of taxpayers fleeing to Puerto Rico, the focus is centered on determining whether those individuals are truly residents of the island or not, as well as if their income is properly sourced to Puerto Rico as opposed to the mainland.

Unlike IRS efforts in the past, the origins of the campaign stemmed from a request from Congress for a report, in which lawmakers voiced concerns about the issue of state and federal governments being shorted on revenue due to corporations and individuals manipulating Puerto Rico’s tax laws to their advantage.

The Puerto Rico Trend Continues

That trend of moving to Puerto Rico for tax incentives has continued even during the pandemic, and the number of New York residents relocating to Puerto Rico has quadrupled compared to 2019. Between March 2020 and February 2021, approximately 82 requests for a permanent move to Puerto Rico were filed by Manhattan residents. The previous year, this number was only twenty-two. Tax lawyers who specialize in Puerto Rican tax incentives say they receive approximately five to 15 inquiries a day from those who wish to determine if they qualify for Puerto Rico’s tax incentives.

Many are day traders or cryptocurrency traders who do not have traditional jobs. Rather, they acquire wealth by making trades on cryptocurrencies, securities, stocks, and other commodities. In this way, they earn capital gains that are 100 percent tax exempt simply because of their location. Other filers who inquire include hedge-fund managers and investment bankers who either provide financial advice to clients or manage their funds, allowing them to enjoy carried interest that is tax exempt.