Act 60 Under Fire: Defending the Puerto Rican Tax Exemption from IRS Annihilation
Puerto Rico's Act 60 (formerly Act 20/22) is widely considered the most aggressive legal tax shelter on Earth. It allows U.S. citizens to drop their corporate tax rate to 4% and eliminate 100% of their capital gains taxes without ever relinquishing their U.S. passport. Unsurprisingly, the IRS views the program with extreme hostility. In recent years, the IRS deployed a specialized task force aggressively targeting thousands of Act 60 decree holders. The IRS's core strategy is not to attack the Puerto Rican law itself, but to ruthlessly attack the taxpayer's operational execution—specifically attempting to prove the taxpayer never actually moved to the island, thereby stripping the decree and assessing massive retroactive U.S. taxes plus 75% civil fraud penalties. Our Offshore Audit Defense Group specializes in defending Act 60 structures against aggressive IRS examination by deploying forensic residency tracing.
The Bona Fide Resident Test
To claim Act 60 benefits, you must legally be a "Bona Fide Resident" of Puerto Rico. To pass this test, you must unequivocally meet three separate criteria: the Presence Test, the Tax Home Test, and the Closer Connection Test. Failing even one test destroys the shield.
The simplest is the Presence Test (spending 183 days a year on the island). Taxpayers frequently fail this due to sloppy record-keeping. The IRS will subpoena your Delta Flight logs and your American Express statements. If your credit card shows you buying coffee in Miami on a day you claimed to be in San Juan, the IRS flags it as perjury. During an audit, our CPAs execute a militant day-count reconstruction, pulling GPS metadata from iPhones, ATM receipts, and E-ZPass records to mathematically lock down the 183-day requirement against IRS scrutiny.
The Lethal "Closer Connection" Trap
Even if you mathematically prove you spent 200 days in Puerto Rico, you can still fail the "Closer Connection Test." The IRS argues that a taxpayer can spend 200 days in a luxury condo in Dorado Beach, but if they left their children in private school in New York, kept their expensive primary doctors in Manhattan, and retained their Hamptons country club membership, their true "center of vital interests" remains in the United States.
The IRS actively pulls DMV records and voter registrations to assault the Closer Connection. Surviving this requires total, scorched-earth extraction from the mainland. We advise clients to sell their U.S. homes, register their dogs with Puerto Rican veterinarians, move their religious affiliations, and vote in Puerto Rican local elections. Without severing these deep subjective ties, the IRS will drag the taxpayer back into the U.S. tax net and classify the entire Act 60 setup as a fraudulent shell.
Sourcing of Income: The Section 937 Siphon
The final IRS attack vector focuses on "Source of Income" rules under Section 937. Remember: Act 60 only exempts income that is *sourced from Puerto Rico*.
If a crypto founder moves to PR, their future capital gains on Bitcoin are sourced to PR and are tax-free. However, if they execute an Export Services business (managing a U.S. marketing agency from PR), they must charge an "arm's length" rate for their personal services. If the founder pulls down $5 million in PR corporate profit but only pays themselves a $40,000 W-2 salary, the IRS will utilize Section 482 to reallocate millions of dollars. They will argue the founder's labor was worth $1 million, forcing that $1 million back into standard U.S. taxation. Defending against reallocation requires highly aggressive Transfer Pricing Studies to legally justify the profit parked in the Puerto Rican entity.