IRS Scrutiny of Act 60 Decree Holders: What You Need to Know in 2026

If you hold an Act 60 decree in Puerto Rico, 2026 is a year that demands your attention. The IRS enforcement apparatus targeting decree holders has been building for several years, and it is now producing real consequences — audits, assessments, and in some cases, settlements in the millions. At the same time, the federal estate tax exemption is scheduled to sunset at the end of 2025, which dramatically changes the planning calculus for high-net-worth decree holders.

This post covers what has changed, what is coming, and — most importantly — what you should do about it right now.

(For foundational information on residency tests, compliance requirements, and income sourcing rules, see our Act 60 Resource Center, which covers those topics in depth.)

What Has Changed in the Enforcement Landscape

Dedicated IRS Resources

The IRS has moved beyond ad hoc examinations. The agency now has personnel specifically assigned to Puerto Rico tax incentive cases, working with data analytics to identify decree holders whose reported income patterns suggest potential non-compliance. This is not a handful of random audits — it is a systematic program.

Congressional Pressure

Bipartisan interest in Act 60 enforcement has intensified. The Joint Committee on Taxation and the Government Accountability Office have both published analyses questioning the revenue impact of Puerto Rico tax incentives. Congressional hearings have generated media coverage, which in turn generates political pressure for the IRS to demonstrate results. Whether or not Congress modifies Act 60 legislatively, the enforcement side is expanding.

TIGTA Reports

The Treasury Inspector General for Tax Administration has issued multiple reports flagging compliance gaps in Puerto Rico residency claims. These reports serve as both a roadmap for IRS enforcement priorities and a public justification for increased audit resources. When TIGTA identifies a problem, IRS field offices respond.

State Departure Audits

High-tax states — New York, California, Connecticut, New Jersey — have their own incentive to challenge the departures of wealthy residents who move to Puerto Rico. State tax authorities cooperate with the IRS and sometimes initiate their own investigations. A successful state challenge can trigger a federal reexamination. For more on this risk, see our State Departure Audits resource page.

The 2026 Federal Estate Tax Sunset: Why It Matters for Act 60 Holders

This is the development most decree holders are not thinking about — and it could cost more than an income tax audit.

The Tax Cuts and Jobs Act of 2017 roughly doubled the federal estate tax exemption. In 2025, the individual exemption sits at approximately $13.61 million ($27.22 million for married couples). Unless Congress acts, that exemption is scheduled to revert to approximately $7 million per individual (adjusted for inflation) on January 1, 2026.

Why does this matter for Act 60 holders specifically?

Act 60 does not exempt you from federal estate tax. The income tax benefits under your decree — 0% capital gains, 4% export services — do not extend to estate and gift taxes. U.S. citizens living in Puerto Rico are subject to federal estate tax on their worldwide assets, just like every other American.

Your Act 60 savings may have concentrated wealth. If you have been paying 0% on capital gains for several years, your net worth has likely grown faster than it would have on the mainland. That accelerated wealth accumulation means more of your estate may be exposed to federal estate tax when the exemption drops.

The sunset creates urgency. If your estate exceeds the post-sunset exemption (~$7 million), the 40% federal estate tax rate applies to the excess. For a decree holder with a $20 million estate, that could mean roughly $5.2 million in estate tax that would not have applied under the current exemption. Planning strategies — lifetime gifting, irrevocable trusts, charitable structures — are most effective when implemented before the exemption drops.

This is where Act 60 tax planning and estate planning intersect in a way that many decree holders have not addressed. The time to act is before the sunset, not after.

What to Do If You Receive an IRS Inquiry

If you receive a letter from the IRS questioning your Act 60-related income or residency, here is a practical framework:

Step 1: Do Not Panic, But Do Not Ignore It

An IRS inquiry is not an accusation of fraud. Most begin as routine information requests or compliance checks. But ignoring the letter — or responding without preparation — can escalate a routine matter into a full examination.

Step 2: Identify What They Are Asking

IRS inquiries targeting Act 60 holders typically fall into three categories:

1. Residency verification. The IRS is asking you to demonstrate that you meet the bona fide residency tests. They want documentation of physical presence, tax home location, and connection to Puerto Rico.

2. Income sourcing challenge. The IRS is questioning whether specific income items were properly sourced to Puerto Rico. This is common with capital gains from pre-move appreciated assets and services income where work was partially performed on the mainland. See our income sourcing rules resource for background.

3. Compliance deficiency. The IRS has identified a potential gap in your filing — for example, failure to file Form 8898 (change of residency), inconsistent reporting between your federal and Puerto Rico returns, or discrepancies in your income reporting.

Step 3: Engage a Professional Before Responding

This is not the time for a DIY response. The initial response to an IRS inquiry sets the tone for the entire examination. An attorney experienced with Act 60 cases can:

• Assess the scope of the inquiry and identify your exposure

• Organize your documentation into a coherent narrative

• Prepare a response that addresses the IRS's concerns without volunteering unnecessary information

• Represent you in discussions with the examining agent

• Identify procedural rights and deadlines you need to protect

Step 4: Assemble Your Documentation

Whether you are responding to a current inquiry or preparing proactively, the documentation package should include:

For residency:

• Day-by-day calendar with corroborating evidence (flight records, credit card transactions, toll records, utility usage)

• Puerto Rico voter registration, driver's license, vehicle registration

• Local professional relationships (doctors, dentists, accountants, attorneys)

• Community involvement (memberships, volunteer activities, religious affiliation)

• Evidence of mainland ties severed (former home sold or leased, accounts transferred)

For income sourcing:

• Work location records (where were you physically when services were performed?)

• Client and revenue analysis (where are your clients located? where do you deliver services?)

• Capital gains basis documentation (when were assets acquired? what is the pre-move vs. post-move appreciation?)

• Export services documentation (contracts, invoices, delivery records showing services exported from Puerto Rico)

For compliance:

• Copies of all filed returns (federal Form 1040, Puerto Rico returns, Form 8898)

• Act 60 decree and any amendments

• DDEC annual reports and charitable donation receipts

• Property purchase documentation (if applicable to your decree requirements)

Step 5: Consider the Resolution Options

Not every IRS examination results in a deficiency. Possible outcomes include:

• No change. The IRS is satisfied with your documentation and closes the case.

• Agreed adjustment. The IRS proposes a specific adjustment (e.g., recharacterizing some income as U.S.-sourced) and you agree. You pay the additional tax plus interest.

• Disagreed — Appeals. You disagree with the proposed adjustment and take the case to IRS Appeals, where an independent officer reviews the dispute.

• Disagreed — Litigation. In rare cases, the matter proceeds to U.S. Tax Court.

Most Act 60 cases that are well-documented resolve at the examination or appeals level. Litigation is expensive for both sides and typically reserved for cases involving large amounts or novel legal issues.

Proactive Steps for 2026

If you have not been audited — and want to minimize the chance that you will be — here are the most impactful actions you can take this year:

1. Conduct a residency self-audit. Review the compliance checklist on our resource center and honestly assess whether your documentation supports your residency claim. Fix any gaps now.

2. Address the estate tax sunset. Meet with an estate planning attorney to evaluate your exposure under the reduced exemption. If your estate exceeds $7 million, consider accelerating gifts or establishing trusts before year-end.

3. Review your income sourcing. Particularly if you have a services business, make sure your working-days allocation is accurate and documented. Travel logs matter.

4. Ensure your filings are consistent. Your federal return, Puerto Rico return, and DDEC annual report should tell the same story. Inconsistencies between these filings are a primary way the IRS identifies examination targets.

5. Organize your documentation system. Do not wait for an IRS letter to start gathering records. Maintain a contemporaneous file — updated monthly — with presence documentation, income sourcing records, and compliance filings. If an inquiry comes, you want to respond from a position of strength, not scramble to reconstruct years of records.

The Bottom Line

Act 60 remains a powerful and legitimate tax planning tool. The program is legal, the benefits are real, and thousands of decree holders are in full compliance. But the enforcement environment in 2026 is materially different from what it was five years ago. The IRS has more resources, more data, and more political support for scrutinizing decree holders.

The decree holders who will weather this environment are those who genuinely live in Puerto Rico, properly source their income, maintain thorough documentation, and integrate their Act 60 planning with their broader tax and estate strategy.

Want to review your Act 60 compliance posture or address the estate tax sunset? Schedule a free strategy call with Riefkohl Law. We work with Act 60 decree holders on residency documentation, income sourcing, estate planning, and IRS examination defense.

Explore our comprehensive Act 60 Resource Center for detailed guides on residency tests, audit triggers, and income sourcing.