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The IRS is Targeting Taxpayers (and Their Advisors) that Purported to Have Moved to Puerto Rico to Avoid Cryptocurrency Capital Gains

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    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:

    1. The taxpayer resides in Puerto Rico for a minimum of 183 days of a taxable year
    2. The taxpayer cannot possess a tax home in another country during the taxable year
    3. 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.

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    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

    Questions and Answers About Foreign Tax Audits

    Questions and Answers about Offshore Voluntary Disclosure Initiative (OVDI)

    Questions and Answers for Criminal Tax Representation

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