Is Act 60 an Expatriation Alternative to Renouncing Citizenship?

Is Puerto Rico an Expatriation Alternative For US Citizens

Why Act 60 is Not an Alternative to Renouncing Citizenship

It is no secret that U.S. Taxpayers want to pay less tax than they already pay. And, while there are various strategies Taxpayers may use to try to reduce or minimize their tax liability — Taxpayers must be very careful of potential tax scams and unethical promoters trying to sell false tax strategies that may result in serious IRS fines and penalties. To try to minimize or avoid U.S. taxes, some Taxpayers decide to terminate their U.S. person status by formerly expatriating from the United States. Recently, we have had Taxpayers approach us who have been goaded into pursuing Puerto Rico Act 60 (PR Act 60) instead of expatriation. It is very important to note that expatriation and PR Act 60 are not the same, and seeking PR Act 60 in lieu of expatriation can be fraught with peril.

Is Act 60 An Alternative to Expatriation?

No, it is not. That is because other than very specific Puerto Rico-sourced income (presuming that Act 60 remains valid), Taxpayers are still taxed on their worldwide income for other sources of income. PR Act 60 is not a magical pill that lets Taxpayers avoid all active and passive income taxes, capital gains taxes, and taxes on crypto income.

First, Taxpayers Remain U.S. Persons for Tax Purposes

Just because a person qualifies for PR Act 60 does not mean they are no longer subject to U.S. tax on their worldwide income. PR Act 60  may help minimize some taxes in situations in which the income can be resourced as Puerto Rico income, but the Taxpayer remains a U.S. person for tax purposes. Therefore, any income generated from the United States is still taxable and any income generated from overseas is still taxable the only income that is not taxable (potentially by the U.S. government) is income that is Puerto Rico-sourced.

Free Crypto Income?

No, of course not. The income generated from PR Act 60 is cryptocurrency income is not exempt from U.S. tax. For some Taxpayers who qualify under PR Act 60 and acquire new assets then at a future date, those assets may escape U.S. taxation when they are sold. But, all of that cryptocurrency that you are taking with you to Puerto Rico already does not escape taxation. So, if your goal is to avoid cryptocurrency taxes and you are worried about the exit tax then simply qualifying for PR Act 60 is not going to generate the benefits you are hoping for.

You Have to Reside in Puerto Rico and Purchase a Residence

Under PR Act 60, the Taxpayer has to not only reside in Puerto Rico, but they have to purchase property in Puerto Rico. In other words, PR Act 60 is not the type of program in which a Taxpayer could simply purchase a property in Puerto Rico, reside outside of Puerto Rico, and then claim the benefits under Act 60.

Investment Income from Foreign Countries

PR Act 60 benefits are primarily limited to income generated from Puerto Rico – and many Taxpayers considering PR Act 60 have income generated from many sources across the globe. Thus, just because the Taxpayer qualifies under PR Act 60 it does not exempt their foreign income (since they are still a U.S. person taxed on their worldwide income). In other words, for any Taxpayer who may have sources of income from outside of Puerto Rico, PR Act 60 does not eliminate taxes on that foreign income.

IRS Audit Campaign Enforcement

The IRS dislikes PR Act 60 very much and believes it is a way that Taxpayers are improperly sheltering income overseas and avoiding taxes. To combat this, the IRS developed an audit campaign aimed at enforcing compliance with U.S. tax laws under PR Act 60. And, whereas a Taxpayer who expatriates from the United States may no longer be subject to any U.S. tax, a Taxpayer who pursues PR Act 60 simply as an alternative to expatriation may find themselves in a deeper tax problem with the IRS.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.