IRS launched a Puerto Rico tax-break crackdown with no list of targets
Summary
Since 2012, thousands of high-income Americans have relocated to Puerto Rico under a tax incentive that can exempt them from federal income tax on investment income; GAO found their average federal tax bill fell 46 percent, from $278,112 to $150,969 a year, a decline GAO estimates costs the federal government hundreds of millions of dollars annually in aggregate. In January 2021, IRS announced a compliance campaign to make sure those taxpayers still met their federal obligations. For the campaign's first four years, IRS never obtained a current dataset of recipients with Social Security numbers attached -- it stopped following up with Puerto Rico's tax agency in 2021 and didn't ask again until 2024, a three-year gap. When Puerto Rico's own economic development agency flagged 179 taxpayers who couldn't show they'd met the residency requirement, IRS reviewed only a handful of the files before deciding not to prioritize them. By mid-2025 the campaign had lost 87 of the revenue agents who conduct these examinations -- about 38 percent of that pool -- while separately, only 12 staff were assigned to coordinate the campaign overall.
A $278,000 tax bill that became $151,000
Puerto Rico's 2012 incentive laws -- Act 22 for resident investors, Act 20 for export-service businesses, both since folded into the territory's Incentives Code -- were designed to pull wealth and residents to the island. GAO identified 2,201 active resident investor incentive recipients in 2021⧉, the most recent year with complete data, and found they were disproportionately wealthy: average adjusted gross income before moving was about $900,000, and 17.4 percent reported an average AGI of $1 million or more, including 1.5 percent averaging $10 million or more. In the five years after relocating, their average federal taxable income fell from $875,241 to $533,832 a year -- a 39 percent drop -- and their average federal tax paid fell from $278,112 to $150,969, a 46 percent drop.
View data as table
| Federal taxable income, before | 875,241 | |
|---|---|---|
| Federal taxable income, after | 533,832 | -39% |
| Federal tax paid, before | 278,112 | |
| Federal tax paid, after | 150,969 | -46% |
A campaign announced, then left waiting on data
The campaign's premise was simple: cross-check who's claiming Puerto Rico's incentive against what they're reporting to the . Executing it required a dataset from Puerto Rico's treasury department, Hacienda, that was both current and included Social Security numbers -- and for the campaign's first four years, IRS never obtained one⧉. made two data requests in 2020 that went unanswered -- Hacienda was recovering from a January 2020 earthquake and the onset of the pandemic -- and then simply stopped asking. 's timeline shows no further request until 2024, a three-year gap, after which Hacienda didn't deliver a full dataset for 2021 until October of that year -- the first time in five years Hacienda gave the complete taxpayer population. Corrected 2022 data and a full 2023 dataset followed only by June 2025.
By May 2024, the slow progress was public enough that then-Commissioner Danny Werfel acknowledged it. An anonymous employee wrote to members of Congress alleging mismanagement was behind the lack of results, and by summer 2024 Democratic staff on the Senate Finance Committee had opened their own investigation.
View data as table
| Active resident investor recipients, 2021 | 2,201 |
|---|---|
| Export service decrees granted since 2012 | 3,899 |
Referrals nobody chased, and a shrinking team
Puerto Rico's own government tried to help. In August 2023, DDEC sent IRS audit reports on 179 taxpayers⧉ who couldn't show they'd met the island's 183-day residency requirement -- one of the tests for the separate federal exemption. A single campaign official reviewed a few of the cases and decided the referrals didn't need to be prioritized; officials told they'd rather spend resources chasing Hacienda's data than working DDEC's leads. reviewed the same 179 files itself and found a significant number of taxpayers with indicators of potential noncompliance -- about half had reported no taxable income to at all in 2019, and every one had between one and seven years of residency noncompliance somewhere in the 2013-2019 span.
Meanwhile the campaign's capacity to do anything with better data was eroding. As of July 2025, up to 12 staff covered the campaign, splitting time across other projects. Audits of this population are resource-intensive -- about two years each, requiring experienced revenue agents to untangle residency and multi-jurisdiction income questions -- and by June 2025 had lost 87 of the revenue agents who conducted these examinations to the Deferred Resignation Program, retirement, promotion, or reassignment: about 38 percent of that examination staff, gone.
View data as table
| Revenue agents lost to attrition (by June 2025) | 87 | ~38% of examination staff |
|---|---|---|
| Staff assigned to the campaign (July 2025) | 12 | splitting time across other work |
What GAO recommended
made three recommendations: establish procedures to regularly obtain current Hacienda data on all resident investor incentive recipients; write down a process for reviewing noncompliance cases Puerto Rico refers; and take concrete steps to promote voluntary compliance, such as sending recipients educational letters about their obligations. agreed with all three. As of the audit's close in November 2025, had drafted but not yet sent the educational letter -- a text it began writing in November 2024, a year earlier, as a direct result of 's review.
The takeaway
- The tax break works as designed; the enforcement campaign built to check it didn't. Recipients' average federal tax bill fell 46 percent after moving to Puerto Rico -- and 's compliance campaign went four years without a complete, current list of who was claiming the exemption.
- stopped asking, and nobody noticed for three years. Two unanswered 2020 data requests to Puerto Rico's tax agency were followed by silence from itself until 2024 -- not Hacienda's silence, but 's own decision to stop following up.
- When Puerto Rico's government did the work of flagging noncompliance, didn't use it. DDEC referred 179 taxpayers with residency-documentation gaps in 2023; reviewed a handful and moved on -- and separately, by mid-2025 had lost 38 percent of the revenue agents who conduct this population's examinations.
Figures are from -26-107225 (December 2025) and 's own January 2021 compliance-campaign announcement, both read directly. does not report the campaign's specific audit results, citing data sensitivity, but does report the volume of audits opened and closed as 'low until substantially increasing in the last year.' The estimated ~1,100 recipients who may not have filed a residency-change form is illustrative arithmetic applying 's stated 'half' share to its 2,201 recipient count, not a number itself publishes.
Sources(2) ▾
- U.S. Government Accountability Office, Puerto Rico: IRS Should Improve Oversight of Taxpayers Claiming Exemption from Federal Taxes (GAO-26-107225) (2025-12-12) — the 2021 recipient count (2,201) and the before/after federal income and tax figures, the aggregate revenue-loss estimate, the campaign's 4-year data gap and 3-year follow-up gap with Puerto Rico's Hacienda (Figure 14 timeline), the 179 DDEC-referred taxpayers did not prioritize, the 87-agent/38% staffing loss, and 's three recommendations gao.gov · original document
- Internal Revenue Service, IRS LB&I Compliance Campaign(s), January 27, 2021 (2021-01-27) — 's own announcement of the Puerto Rico Act 22 compliance campaign's identification and selection, independent confirmation of the campaign's 2021 launch date irs.gov · original document
Comments
Always open. Logged-in readers can annotate paragraphs in place.
In 2012, Puerto Rico began offering high-net-worth Americans a deal: relocate, and much of your investment income becomes exempt from federal tax under a federal law that already excuses Puerto Rico residents from tax on island-sourced income. found that recipients of the resulting resident investor incentive saw their average federal tax bill fall 46 percent after moving -- from $278,112 to $150,969 a year -- a decline estimates costs the federal government hundreds of millions of dollars annually across the whole recipient population. IRS announced a compliance campaign⧉ to police this in January 2021. Four years later, found the campaign still didn't have a current, complete list of who was actually claiming the break.