When receiving advice from a tax professional or a company that specializes in taxes, a client expects that they will be provided with helpful guidance on how to limit their tax liability. Regrettably, there are tax professionals who will provide their clients with illegal tax strategies simply to turn a profit. For example, possibly hundreds of taxpayers have falsely been led to believe that repatriating to Puerto Rico would be a valid way to avoid the capital gains tax on their cryptocurrency earnings. This gross abuse of the client’s trust is unthinkable and could mean that the client will face tax penalties and potential criminal tax prosecution due to the sketchy tax advice they received. The California dually licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing are here to explain why and how the Internal Revenue Service is targeting taxpayers using a Puerto Rico residence to avoid cryptocurrency capital gains tax.
How Puerto Rico Individual Investors Act Works
On January 17, 2012, Puerto Rico passed Act 22 of 2012, also referred to as the Individual Investors Act (IIA), in order to enhance the economic situation of Puerto Rico. The purpose of the IIA is to give tax breaks to individual investors that reside within Puerto Rico. However, there are a few requirements that must be met by taxpayers in order to claim the tax exemptions offered by the IIA.
To be eligible to claim tax exemptions from the IIA on your tax return, you must be a “bona-fide resident” of Puerto Rico. The following three factors must be true for a taxpayer to be deemed as a bona-fide resident:
- The taxpayer resides in Puerto Rico for a minimum of 183 days of a taxable year
- The taxpayer cannot possess a tax home in another country during the taxable year
- The taxpayer cannot have closer ties to the United States or another country besides Puerto Rico
Tax Exemptions Available through Individual Investors Act
The IIA provides a wide range of benefits for investors and other taxpayers who decide to relocate to Puerto Rico. Here are some benefits available to bona-fide residents of Puerto Rico that are eligible under the IIA:
- Tax exemptions on all dividends from income taxes
- Tax exemptions from income taxes on interest
- Tax exemptions provided on income taxes short- and long-term capital gains earned AFTER the taxpayer has attained bona-fide resident status in Puerto Rico
It is also important to note that capital gains realized PRIOR to bona-fide resident status could receive preferential income tax rates in Puerto Rico. However, this could be a complicated tax benefit to navigate for a taxpayer. If a taxpayer was not given the proper advice and claims the incorrect tax exemptions for their cryptocurrencies gains, this could result in serious legal trouble.
Why Taxpayers are Targeted by the IRS for Cryptocurrency Capital Gains Tax in Puerto Rico
Despite being a U.S. territory, being a bona-fide resident of Puerto Rico means that a taxpayer would not have to report income that is gained from sources WITHIN the country. However, as a U.S. person, a taxpayer who lives in Puerto Rico is still subject to federal income tax on income earned from avenues OUTSIDE of Puerto Rico. This means that cryptocurrency income that is derived from a U.S. source will be subject to federal income taxes.
The reason why many taxpayers are being targeted by the IRS for repatriating to Puerto Rico for the IIA is that every taxpayer that filed under the Act is not considered a bona-fide resident. Specifically, taxpayers are claiming the capital gains tax exemptions for cryptocurrencies offered by Puerto Rico without meeting the requirements listed above. This tax strategy is extremely dangerous as the civil or criminal tax and foreign information reporting penalties for intentionally evading federal income taxes, and or intentionally omitting foreign account (FBAR) reporting could be incredibly severe.
If you engaged in the exclusion of cryptocurrency gains from your tax return under the false belief that you were eligible for tax exemptions under the IIA, the IRS may be preparing to investigate you and the tax professional that suggested this take this action. A taxpayer need only evade $30,000 worth of taxes to face a year of incarceration under the federal sentencing guidelines. The actual length of incarceration increases from there based on the amount of tax loss to the federal government.
You should also be aware that the civil penalties for the evasion of cryptocurrency capital gains tax are often astronomical. For instance, a taxpayer that does not properly report their foreign financial accounts on an FBAR form could be subject to a 50% penalty on the highest cumulative balance of their offshore accounts.
If you believe that you violated the bona-fide resident rules for the IIA or have received notice of a violation from the IRS, you should move quickly to get this matter under control.
Call Us if You Were Advised to Move to Puerto Rico to Avoid Cryptocurrency Capital Gains
If you were given tax advice to repatriate to Puerto Rico to avoid the capital gains tax on your cryptocurrency earnings, contact our dually licensed California Tax Lawyers & CPAs. We understand that being targeted by the IRS is a stressful experience for a taxpayer, and we could help you develop a legal strategy to resolve this matter reasonably quickly and remove the risk of criminal tax and offshore information reporting fraud. Scheduling a confidential consultation can be performed by calling the Tax Law Offices of David W. Klasing at (800) 681-1295. More information about the consultation process could be found on our website.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
Questions and Answers about FBAR Compliance and Disclosure
- Potential charges for not participating in the 2014 OVDP
- How many tax returns will I amend for my FBAR filing?
- FBAR Voluntary Disclosure program end
- Can I make a voluntary disclosure after the deadline?
- Can I use IRS Voluntary Disclosure if I Can’t Pay?
- Potential reporting requirements and civil penalties
- What Happens if You Don’t Disclose Foreign Accounts
- Criminal charges if you refuse voluntary disclosure
- Characteristics of FBAR voluntary disclosures
- What is required to make a valid voluntary disclosure?
- 2012 Offshore Voluntary Disclosure Initiative Objectives
- What is an FBAR?
- Filed amended returns without making a Voluntary Disclosure
- Undisclosed foreign accounts: What exchange rate to use
- Why did the IRS announce the 2012 OVDI at this time?
- Should I consider making an offshore voluntary disclosure?
- Why to consider making a Voluntary Disclosure
- 2012 OVDI program vs. the voluntary disclosure practice
- Foreign bank account asset reporting/filing requirements
Questions and Answers About Foreign Tax Audits
- Does the Fifth Amendment apply to foreign accounts?
- How is evidence cultivated from foreign sources?
- How is tax loss determined?
- How might an FBAR audit be resolved?
- Is a penalty assessment ripe for judicial review?
- Overview of an administrative criminal investigation
- What is the process of an FBAR referral?
- Statute of Limitations raised during a FBAR audit?
- Precautions to be taken in the pre-audit phase
- Recent international tax and reporting prosecutions
- Foreign account, entity and investment prosecution
- Who collects restitution and penalties?
- International tax investigations are an IRS high priority
Questions and Answers about Offshore Voluntary Disclosure Initiative (OVDI)
- Why hire David W. Klasing to represent me in an audit
- 2011 Offshore Voluntary Disclosure Initiative FAQ
- Key Features of Initiative
- Eligibility For This Initiative
- 2011 OVDI Process
- Calculating The Offshore Penalty
- Statute of Limitations
- FBAR Questions
- Taxpayer Representatives
- Case Resolution
- What not to do!
- What to do!
- FBAR Reporting and Expired Voluntary Disclosure Program
- How the Law Offices of David W. Klasing Can Help
- Bank account overseas I didn’t report on my income tax
- Do I have to maintain information on overseas bank accounts
Questions and Answers for Criminal Tax Representation
- When tax defense counsel parallels tax crime investigation
- Guilty of tax obstruction by backdating documents?
- To be found guilty of tax obstruction must a person actually be successful in impeding the IRS’s functions?
- Help! The Document I Gave the IRS Had False Information
- Tax crime aiding or assisting false return IRC §7206(2)
- What is the crime known as tax obstruction § 7212?
- What is the difference between tax perjury and tax evasion?
- What is the tax crime commonly known as tax perjury?
- What is a Klein Conspiracy?
- Increased possibility of civil action in IRS investigation
- Am I Guilty of Tax Evasion if the Law is Vague?
- What happens if the IRS thinks I committed tax crimes?
- What are ways to defend against a tax evasion charge?
- Difference between criminal tax evasion and civil tax fraud
- What accounting method does the IRS use for tax fraud
- Can I Change Accounting Method to the Accrual Method
- What is the willfulness requirement for tax evasion?
- I didn’t know I committed tax fraud. Can I get off?
- Concealed assets from IRS. Can I avoid tax evasion charges
- How government proves I willfully engaged in tax evasion
- What is the venue or court where a tax crime case is heard?
- Must the IRS prove tax crimes beyond a reasonable doubt?
- Is it a crime to make false statements to the IRS?
- Will the IRS overlook my tax evasion if it’s minor?
- Failed to tell IRS about my nominee account
- Audit risk with cash based business transactions
- How to defend a client charged with tax evasion
- Is it tax evasion if I didn’t file income tax return?
- Government says I attempted to evade my taxes. Now what?
- I forgot to pay my taxes or estimated tax. Is this a crime?
- Government proof I “willfully” failed to pay taxes
- 5 Ways to Respond to Tax Evasion Charges
- Being audited after using a tax professional
- Rules for what an IRS agent can do while investigating me
- How tax preparers, attorneys and accountants are punished
- How the IRS selects tax crime lead for investigation
- How does the IRS prosecute suspected tax crimes?
- Does IRS reward informant leads for suspected tax crimes?
- How the government proves deficiency in a tax evasion case
- Do prior tax crimes factor into new IRS tax convictions?
- Requesting conference before investigative report is done
- Requesting conference after IRS Special Agent Report
- What are my rights during an IRS criminal investigation?
- Avoid prosecution for tax crime with voluntary disclosure?
- Defense tactics that make it hard for to prove willfulness
- How a tax attorney can stop your criminal tax case?
- What can you generally tell me about tax crimes?
- Continuing filing requirement with investigation pending
- Federal criminal code crimes that apply to tax issues
- Penalty for making, subscribing, and filing a false return
- CID special agent’s report for criminal prosecution
- What is the discovery process in a criminal tax case?
- What the IRS includes in indictment for tax case
- What is the hardest element of a tax crime to prove?
- IRS methods of gathering evidence to prove tax crime
- What does a grand jury do in IRS tax crime prosecution?
- Failure to keep records or supply information
- Failure to make a return, supply information, or pay tax
- What is attempting to evade payment of taxes?
- What is income tax evasion and how is it punished?
- What is attempted income tax evasion?
- What is the crime of failure to pay tax? What is punishment
- Crime of making or subscribing false return or document
- Criminal Investigation Division investigation tactics
- Tax crimes related to employment tax forms and trust funds
- Tactics to defend or mitigate IRS criminal tax charges
- How the IRS generates leads about suspected tax crimes
- What is the crime ”evasion of assessment” of tax?
- Specific examples of “attempting” to evade tax assessment
- What is the so-called Spies evasion doctrine?
- Does overstating deductions constitute tax evasion?
- Is it tax evasion if my W-4 contains false statements?
- IRC §7201 attempt to evade vs. common-law crime of attempt
- What are the penalties for Spies tax evasion?
- How government proves a taxpayer attempted tax fraud
- What is a tax that was “due and owing.”
- What is evasion of assessment for tax liability?
- Is evasion of assessment different from evasion of payment
- Does the IRS have a dollar threshold for tax fraud?
- What is the IRS burden of proof for tax fraud convictions?
- Are Tax Laws Constitutional?
- What is the source of law that defines tax evasion?
- Does section 7201 create two distinct criminal offenses?
- Does tax evasion definition include partnership LLC
- What if I helped someone else evade taxes?
- Is it illegal to overstate deductions on my tax return?
- Is it illegal to conceal bank accounts from the IRS?
- Do later losses justify prior deductions?
- Common reasons the IRS and DOJ start investigations
- What is the Mens Rea component of tax crimes?
- What is a proffer agreement and what are the risks?
- Why to have an attorney to review a proffer agreement
- Why enter into a proffer agreement?
- Limited use immunity from proffer agreements
- Difference between civil and criminal fraud allegations
