IRS audits high income Act 60 decree holders in Puerto Rico for tax evasion

IRS targets Act 60 decree holders who fail Section 937 residency tests

The IRS Large Business & International Division is actively auditing U.S. citizens who claim Puerto Rico Act 60 and former Act 22 tax benefits without meeting the bona fide residency rules under Section 937. The campaign covers decree holders who fail the presence, tax home or closer connection tests and those who mis-classify U.S.-source income as Puerto Rico-source to dodge federal tax.

Enforcement sharpened after a Government Accountability Office report released in December 2025 (GAO-26-107225) found the Act 60 regime costs the U.S. hundreds of millions of dollars a year and flagged weak IRS oversight. The agency now has updated participant data from Puerto Rico authorities and is expanding examinations, soft letters and coordinated audits.

Who the campaign is hitting

The IRS is focused on high-income individuals who relocated for the 0% rate on investment income, including investors with large stock, crypto or business-sale gains. Decree holders under the Individual Resident Investor chapter of Act 60 face the closest scrutiny on day counts and income sourcing.

Digital nomads and remote workers are squarely in the crosshairs when their lifestyle contradicts their tax filings. Common red flags include extended mainland stays, primary clients or teams based in the U.S., family remaining stateside and personal ties (driver's license, voter registration, permanent home) outside Puerto Rico.

Tourists and short-stay visitors who don't claim residency benefits aren't affected by this campaign.

What decree holders need to document

To qualify as a bona fide Puerto Rico resident for federal tax purposes, all three Section 937 tests must be met every year:

• Presence test: at least 183 days in Puerto Rico during the tax year or one of the alternative multi-year day-count formulas
• Tax home test: principal place of business or main residence located in Puerto Rico, not the mainland
• Closer connection test: stronger personal and economic ties to Puerto Rico than to the U.S., measured by home, family, belongings, bank accounts, civic life and where time is spent

Holding an Act 60 decree doesn't satisfy these federal tests. Practitioners recommend keeping detailed travel logs, moving family and core business operations to the island and reviewing income sourcing positions with a tax adviser before filing.

Read our full Puerto Rico guide for the complete picture.