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IRS Failed to Monitor Puerto Rico’s Huge Tax Breaks, Whistleblower Claims

San Juan, Puerto Rico

A whistleblower claims the IRS failed to police abuses related to tax breaks offered to new residents of Puerto Rico.Maridav/Getty Images

  • The IRS’s investigation into the abuse of a Puerto Rican tax benefit has made little progress, a whistleblower said.

  • In a letter reviewed by The New York Times, the insider claims that less than 1% of grantees have been audited.

  • The tax break allows new residents of Puerto Rico to be exempt from local taxes on investment profits.

A whistleblower claims the Internal Revenue Service hasn’t done enough to stop the exploitation of a tax break in Puerto Rico, The New York Times reported.

The agency’s three-year campaign to uncover tax benefit abuses has failed to make much progress, according to a letter written by an IRS internalist. Less than 1% of recipients were audited and reported no taxes, the whistleblower said.

“It is my understanding that no assessment has been completed by any office nationally for a campaign that has been open for three years,” the letter states.

The document reviewed by The New York Times triggered a Senate investigation, and lawmakers are now urging the enforcement campaign to accelerate.

The high-profile IRS operation centers on a 2012 tax break that allows new Puerto Rican residents to avoid paying local taxes on investment income earned while residing on the island. Such perks are common on the island territory, offered to entice wealthier Americans and businesses to locate there.

Although at first glance this benefit seems easy to apply – it is primarily determined by where the investor resides – complications arise when an investment made outside of Puerto Rico generates a profit after the residents move there. the island.

For example, if a business was started on the mainland United States and sold after its owner moved to the island, the tax benefit should only apply for years lived in Puerto Rico. However, there is growing concern that investors will ignore this and exempt their entire profits.

The IRS opened its investigation into the matter after the 2020 indictment of Gabriel Hernandez, an accountant accused of offering to help wealthy Americans exploit the 2012 tax break, Bloomberg reported. Hernandez has pleaded not guilty.

However, according to the whistleblower’s letter, few enforcement actions have been taken against those who might abuse this benefit.

For example, the IRS typically sends “soft letters” to all reviewed beneficiaries, encouraging them to voluntarily resolve any potential problems with their taxes. Yet the agency issued no cover letter, the whistleblower said.

“This is completely absurd given the amount of taxes involved,” the source wrote.

In an interview with The New York Times, IRS Commissioner Danny Werfel acknowledged that no sweet letters had been sent, but pointed to the dozens that have been audited. He also said the campaign is still in its early stages and momentum is growing after the agency received $80 billion in new funding under the Inflation Reduction Act of 2022.

“We are still emerging from our period of underinvestment and we are continuing to flex muscles that have atrophied,” IRS Commissioner Danny Werfel told the New York Times.

Read the original article on Business Insider