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Ultrarich US Leavers Who Now Live in Puerto Rico Finding That The IRS Was Waiting For Them

According to accountingTODAY, private wealth clients, hedge fund managers and cryptocurrency traders fleeing to Puerto Rico for its huge tax breaks and to escape President Joe Biden’s proposed capital gains tax increases are now the focus of a sweeping Internal Revenue Service review.

The country’s tax collector quietly launched a coordinated campaign in late January to examine individuals who took advantage, starting in 2012, of tax incentives designed to lure high net-worth individuals and corporations to Puerto Rico. More than 4,000 mainland U.S. residents and firms have moved to the territory between 2012 and 2019, revealing potentially hundreds of millions of dollars in lost tax revenue to the U.S. government, according to an IRS report delivered to Congress.

Individuals Have Already Started Receiving Requests For Information, According To Tax Attorneys That Advise Clients On Federal Income Tax Issues Under PR Tax Incentive Laws.

More Audits Are Anticipated Now
That The U.S. Tax Filing Deadline Has Passed.

At issue are taxpayers who may have excluded income subject to U.S. tax, or failed to file and report income altogether when they moved to Puerto Rico, according to the IRS notice. The agency is also targeting those who claim to be bona fide residents of Puerto Rico but may be “erroneously reporting” U.S. income to evade taxes.

It also comes amid a wider crackdown by the Treasury Department, which recently released 
estimates showing wealthy taxpayers as a group are hiding billions of dollars in income. Treasury Secretary Janet Yellen has previously warned that if left unaddressed the tax gap could grow to $7 trillion over the next decade. Campaigns by the IRS often take years to organize, as agents begin to detect factual patterns that indicate a significant loss of revenue due to noncompliance. 

In The Case of Puerto Rico, Much of The Focus Will Be on Establishing Whether Individuals Are Truly Island Residents 

and Whether They Properly Sourced Income to Puerto Rico.

The IRS’ report to Congress calculated that more than 1,924 applicants, corporations, LLCs, partnerships and other types, had been granted tax benefits under the Exports Services Act (formerly known as Act 20) as of March 2020 based on partial information provided by Puerto Rico. Act 20 offers entities a 4% corporate rate on business income and 100% tax exemption on dividends. That provision along with the Individual Investors Act have now been consolidated into a new incentive law to attract individuals and investments to the island.

More than 2,300 individuals were also granted tax exemptions on passive income, such as dividends and capital gains, under the Individual Investors Act (formerly known as Act 22) between 2012 and 2019, according to the IRS report. Of those individuals, the IRS could identify only 25% or 647 individuals who had previously resided in California, Florida, New Jersey, New York and Texas. They paid nearly $558 million in combined federal income taxes in the five years prior to their relocation to Puerto Rico, representing a fraction of potential loss revenue to the U.S. Treasury’s coffers.

The Trend to Leave the US For Puerto Rico
Has Continued Since the Start of the Pandemic.

 Witth the number of Manhattan residents relocating to Puerto Rico growing by at least fourfold compared to the previous year, according to change of address data from the United States Postal Service.

Between March 2020 and February 2021, at least 82 requests were filed for permanent moves to Puerto Rico by New York City residents compared with only 22 the previous year. Additionally, at least another 11 Manhattan addresses temporarily forwarded their mail during the pandemic to the island. None had done so the year prior.

Many are day traders without traditional jobs that spend their wealth making trades on stocks, securities, commodities and cryptocurrencies, earning capital gains that are 100% tax-exempt. Others include investment bankers and hedge fund managers, who either manage funds or provide financial advice to clients, allowing them to earn tax-exempt carried interest.

Individuals Identified by the IRS Will Have to Prove
Their Puerto Rican Residency,
a Key Factor in Claiming the Tax Benefits.

Taxpayers Must Live on The Island For A Minimum of 183 Days Annually Every Year to Be Considered A Bona Fide Resident.

Maintaining a residency goes beyond simply leasing an apartment in popular Dorado Beach. It includes bringing your main possessions, joining local clubs, updating your voter registration status, moving with your spouse, and enrolling your children in the island’s schools.

“You should also try to minimize contact with mainland U.S.,” said Carballo-Irigoyen. “If the IRS were to audit and they look at your life, they have to be convinced this is where you live.”

Moving, even if someone has qualified for tax incentives from Puerto Rico, doesn’t necessarily make someone exempt from filing a U.S. tax return, Leeds said. Also, “it’s only Puerto Rico source income that is eligible for exemption. It’s not foreign source. It’s not U.S. source. Only Puerto Rico source.”

 Want to Become a PR Resident
and Reduce Your Taxes?

     Contact the Tax Lawyers at
Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:

or Toll Free at 888 8TAXAID (888-882-9243) 

Read more at: Tax Times blog

TAS Extending Through The 12/31/21 Permission For TAS Employees To Send & Receive Documents By Email

In a memo TAS-13-0521-0007 dated 5/17/2021, the Taxpayer Advocate Service (TAS) has announced that it is extending, through the end of the year, its guidance allowing TAS employees to receive documents by email and transmit documents via email to taxpayers and representatives with their consent, using SecureZip (a program that encrypts email attachments) or other authorized secured messaging system.

As with prior guidance, TAS employees may also accept images of signatures (scanned or photographed) and digital signatures on various IRS and TAS official documents.

Previously, the guidance was due to expire on June 30.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
Toll Free at 888 8TAXAID (888-882-9243) 

Read more at: Tax Times blog

IRS Makes Changes to Practitioner Priority Service and Automated Collection System

In issue 2021-05e-News for Payroll Professionals (05/27/2021), the IRS announced that it has made changes to the services provided by the Practitioner Priority Service and Automated Collection System. 

The Practitioner Priority Service (PPS) is a support line staffed by IRS assistors specially trained to handle practitioners' questions about their taxpayer clients' accounts. PPS is available to all tax professionals with a valid taxpayer authorization (i.e., Form 2848, Power of Attorney and Declaration of Representative; Form 8821, Tax Information Authorization; or Form 8655, Reporting Agent Authorization). (Practitioner Priority Service)

The Automated Collection System (ACS) is a call center that was created to provide taxpayers and their representatives with the opportunity to resolve delinquent tax obligations with a single telephone contact. The ACS computer system allows ACS assistors to take a wide range of actions to resolve collection issues. (Internal Revenue Manual (IRM)

Under the recently announced service changes:

  • ACS will now exclusively resolve collection issues. Taxpayer representatives working with ACS to resolve collection issues will need the taxpayer's authorization on Form 2848. Representatives without a taxpayer's authorization on Form 2848 can't act on behalf of the taxpayer to resolve collection issues.
  • PPS assistors will not handle any collection activities, including setting up installment agreements or short-term payment plans. However, PPS assistors will continue to work with representatives with taxpayer authorizations on Form 2848, Form 8821, or Form 8655 to resolve issues such as misapplied payments, correcting math error issues, account adjustments, and missing returns. 

To minimize any disruptions resulting from these service changes, the IRS has updated the PPS automated recording to say: "If your client's account is in Automated Collection System status, ACS, or you need to address balance due issues, press or say 4."

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
Toll Free at 888 8TAXAID (888-882-9243) 

Read more at: Tax Times blog

All That You Wanted to Know About Form 706NA – Part I

On Tuesday, August 15, 2017 we posted Issues Concerning Filing a Form 706NA? where we discussed that deceased nonresidents who were not American citizens are subject to U.S. estate taxation with respect to their U.S.-situated assets. We also discussed that Many foreigners owning property or assets in the United States are in violation of 706-NA filing requirements because of a number of misunderstandings. The basic rule is pretty clear-if a foreign decedent has assets in the United States with a gross value in excess of $60,000, the estate is supposed to file a tax return with the Internal Revenue Service. 

Now we are supplementing this posting with a discussion regarding Form 706 NA in a 3 part series, which we have titled All That You Wanted to Know About Form 706NA. PART 1: 

In the area of estate tax compliance, many of us have prepared Form 706’s, the estate tax return for US citizens and domiciliaries.  To be sure, this form is quite voluminous and can take a while to fill out but there are very few mysteries beyond schedule E; what percentage of an asset might be includable in an estate, the value of an annuity, what debts and expenses are deductible, the calculation of the marital deduction, and the generation-skipping tax computation. 

The Form 706NA, however, preparation of the tax return for the estate of the nonresident alien owning property in the United States, can present a more daunting task.
Form 706NA is deceptively simple- two pages- how difficult could it be to prepare? For 32 years as a senior attorney at the IRS, our Estate Tax Attorney Robert S. Blumenfeld audited these tax returns, and he can tell you that they are more fraught with more potential mystery than the Sphinx. 
Let's look at line 1 where it requests  the decedent's name. Many foreign decedents come from countries where people have hyphenated names, especially the spouses. So is the correct name Maria Smith or Maria Smith- Gonzalez? It is often best to go back to the country where the decedent lived and use the name which drops the post hyphenated portion. Most of the tax returns that he has seen or prepared, are based it on this concept.
The next box asked for the decedent’s tax identification number. Virtually all American citizens born in the United States are assigned SS#’s at birth so there is no problem. In the case of a nonresident alien (N/A), there is no tax identification number so we enter “N/A-nonresident alien” inbox two. 
This creates the second problem. If the estate has to pay any transfer tax, when the return is filed, there is no module (TIN or SS#) into which the IRS can place the payments. Ergo, the IRS has a fund called “unpostables” where money paid to the IRS lacks an identification number with which to associate it. Therefore, if you file a Form 706NA which shows tax, be certain to keep a copy of the front of the check and photostat the endorsement after the check is negotiated. This is the least difficult way to associate the payment with the tax return. Absent keeping these two identification benchmarks, it could take many months for the IRS to agree that the payment in the unpostable module should be associated with a particular estate.
Decedent’s domicile and citizenship are very critical. The United States currently has circa 20 estate/gift tax treaties with foreign countries, many of which are in Europe. 
A non-resident alien from a non-treaty country receives an estate tax exemption (unified credit) of $13,000 which basically means that the first $60,000 is not taxed. The unified credit for treaty based countries can reach a figure of $5.5 million free of tax. In addition to this, in each instance where one represents a nonresident alien decedent, it is critical to find out whether this is a country which has such a treaty with the United States. 
Next, it is critical to determine the citizenship and domicile of the decedent. When one peruses the individual treaties, one will note that some treaties are based on domicile, others on citizenship.  A German citizen domiciled in say Mexico would not be able to utilize the German treaty because that particular treaty is predicated on domicile. A Mexican citizen however, domiciled in Germany, could enjoy the full benefit of the US/German treaty. Ergo, a German living in Mexico would have a $60,000 exemption from tax while a Mexican domiciled in Germany would have a $5.5 million exemption.

Have a US Estate Tax Problem?

Estate Tax Problems Require

an Experienced Estate Tax Attorney 
Contact the Tax Lawyers at
Marini & Associates, P.A.
 for a FREE Tax Consultation Contact US at
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888-8TaxAid (888 882-9243).

Robert S. Blumenfeld  - 
 Estate Tax Counsel
Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.



Read more at: Tax Times blog