The U.S. Internal Revenue Service (IRS) is pursuing tax dodgers who abused Puerto Rico’s tax structures, Bloomberg reported on July 12.

Puerto Rico has offered significant tax incentives to cryptocurrency traders, hedge fund managers, and other American investors since 2012. This policy has allowed some investors to legally avoid paying federal income tax and no taxes at all on dividends, interest, and capital gains income.

In order to qualify for Puerto Rico’s tax policy, investors must reside in Puerto Rico for at least 183 days each year and maintain close local ties. Bloomberg further reported over 5,000 U.S. citizens and 3,600 businesses have qualified for tax incentives since 2012.

But despite the otherwise legal nature of Puerto Rico’s tax breaks, investigators are now looking into whether investors have been honest about the duration of their residence on the island and the sources of their income.

At least two criminal investigations, including one involving a U.S. lawyer, could soon see charges filed, according to Bloomberg’s sources. Potential charges reportedly include conspiracy and wire fraud. The investigations target taxpayers as well as promoters, attorneys, and accountants who marketed the tax program.

Bloomberg noted that BDO Puerto Rico accountant Gabriel F. Hernandez faced wire fraud charges related to IRS reporting in October 2020. It said that any charges resulting from the latest investigations would be the first since that case, which remains pending.

Taxes appeal to Americans, but not locals

Bloomberg noted that, whereas American investors have benefited from the tax policy, local citizens have expressed backlash against the program. Puerto Ricans allege that the policy raises real estate prices and gives Americans preferential treatment.

Similar reports emerged in 2022 when local residents engaged in protests around the policy. Bloomberg alluded to those demonstrations in its latest report.

Local residents, however, are criticizing the influx of wealthy Americans for inflating real estate prices and contributing far less in taxes than native Puerto Ricans. The opposition is growing, with proposed legislation to reform the incentives and sporadic protests against the arrival of these low-tax “settlers.”

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