IRS Enforcement of Act 60: Campaign 685 & Criminal Prosecutions

Content current as of April 2026. This page is for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Consult qualified counsel before acting.

The IRS Has Full Jurisdiction in Puerto Rico

A common misconception among Act 60 decree holders is that relocating to Puerto Rico means "freedom from the IRS." This is legally wrong and dangerously misleading. The IRS has full enforcement jurisdiction in Puerto Rico. The operative federal exclusion is provided by IRC §933, which excludes Puerto Rico-source income from federal gross income for bona fide Puerto Rico residents. The BFR test under IRC §937 must be satisfied for the entire taxable year, with a limited exception under the year-of-move safe harbor (Treas. Reg. §1.937-1(f)). IRC §933 does not exclude U.S.-source income, does not eliminate the federal filing requirement, and does not limit IRS authority in any way.

Act 60 decree holders must file Form 1040 annually with the IRS, comply with FBAR (FinCEN Form 114) and FATCA (Form 8938) requirements, and accurately report worldwide income with proper sourcing.

Compliance Campaign 685

In 2021, the IRS Large Business & International Division launched Compliance Campaign 685, a dedicated enforcement initiative targeting Act 60/22 decree holders. The campaign has 12 staff members focused specifically on auditing:

• Bona fide residency compliance—whether the taxpayer actually meets the IRC §937 three-part test
• Income sourcing—whether income claimed as PR-source was properly allocated under IRC §§861–865
• Pre-move capital gains—whether appreciation accrued before establishing PR residency is properly taxed at federal rates
• Entity structuring—whether export services companies meet Chapter 3 substance requirements

Criminal Prosecutions

The IRS has moved beyond civil audits. Several Act 60 decree holders have faced criminal prosecution for:

• Fraudulent residency claims—claiming bona fide residency while spending most of the year on the mainland
• Income sourcing manipulation—mischaracterizing mainland-source income as Puerto Rico-source to qualify for the exclusion
• Failure to report pre-move gains—treating appreciation that accrued before the relocation as exempt Puerto Rico income

Convictions have resulted in prison sentences, substantial fines, and full back-tax liability plus penalties and interest. The Gajwani prosecution (2025) is a notable recent case that underscores the IRS’s willingness to pursue criminal charges against decree holders who fail to comply with residency and sourcing requirements.

Scale of Enforcement

Approximately 1,800 decree holder audits were underway or completed in 2025. The DDEC and IRS exchange information about decree holders—a DDEC compliance finding or revocation can trigger an IRS examination, and vice versa. This coordinated enforcement posture shows no sign of slowing.

GAO Reports & Congressional Scrutiny

The U.S. Government Accountability Office (GAO) has published multiple reports examining the Act 60 program, raising concerns about revenue loss and compliance gaps. These reports have led to increased Congressional scrutiny and calls for enhanced IRS enforcement—a trend that shows no sign of slowing.

Why Attorney-Client Privilege Matters

If the IRS audits your Act 60 compliance, communications with your CPA are not privileged. The IRS can subpoena your accountant’s workpapers, emails, and notes. In contrast, communications with your attorney are protected by attorney-client privilege—they cannot be compelled in an audit or criminal investigation.

This distinction is critical for Act 60 decree holders making decisions about residency compliance, income sourcing, and entity structuring that carry criminal exposure.

How to Protect Yourself

• Maintain meticulous records of your physical presence in Puerto Rico (travel logs, flight records, gym check-ins, medical appointments)
• Ensure proper income sourcing under IRC §§861–865, especially for service income and intangible property
• Work with legal counsel—not just a CPA—for compliance decisions that carry criminal exposure
• Complete Act 52 biennial certification on time (see Compliance Certificates & AUP)
• File all required federal returns including Forms 1040, 8898, 8938, and FinCEN 114

Related Resources

• Federal Reporting: FBAR, FATCA, CFC/PFIC — your federal filing obligations don’t disappear
• DDEC Revocation Procedures — how decrees get revoked and the tax reversion consequences
• Compliance Certificates & AUP — biennial certification requirements
• Decree Comparison Table — requirements by decree era