A new federal report scrutinizes Puerto Rico’s tax incentives luring wealthy Americans

Federal Audit Reveals Oversight Gaps in Puerto Rico’s Tax Incentives for Wealthy Transplants

Puerto Rico’s controversial tax incentives, designed to attract wealthy Americans to the U.S. territory, have come under intense scrutiny following a new report released Friday by the U.S. Government Accountability Office (GAO). The report highlights significant concerns about federal oversight and questions the economic benefits for local residents.

The tax breaks, which have drawn thousands of affluent individuals to the island over the past decade, may amount to hundreds of millions of dollars annually in forgone revenue. The GAO report specifically urges the Internal Revenue Service to strengthen its oversight, warning that some beneficiaries “may not be meeting their federal tax obligations.”

Democrats on the U.S. House Natural Resources Committee requested the investigation in July 2023 to examine whether these incentives were creating “an unfair tax haven for the ultra-wealthy” without benefiting Puerto Rico’s population. U.S. Rep. Jared Huffman of California criticized the current situation, noting that after downsizing during the Trump administration, the IRS lacks sufficient resources to verify whether wealthy transplants are meeting residency requirements or contributing meaningfully to local communities.

The audit, conducted between December 2023 and July 2024, revealed that Puerto Rico has granted more than 5,800 resident investor incentive decrees and nearly 3,900 export service business exemptions since 2012. California leads as the primary source of these resident investors, followed by Florida, New York, and Texas.

While the IRS announced an investigation into potential tax avoidance in 2021, the GAO found this effort “only recently began showing results” due to several factors, including “the complexity of high-income and high-wealth audits, IRS not prioritizing the effort, and communication gaps between IRS and Puerto Rico.” Until this year, federal tax authorities couldn’t obtain complete Social Security data on incentive claimants to ensure compliance.

The report cited a particularly troubling example from August 2023, when Puerto Rican officials identified 179 taxpayers who failed to provide evidence meeting residency requirements. When this information was shared with the IRS, “one official reviewed a few cases before determining the referrals did not need to be prioritized,” according to the GAO.

Rep. Alexandria Ocasio-Cortez condemned the exemptions, arguing they are “driving up wealth inequality on the island” while “stealing valuable federal tax revenue used to fund Social Security, Medicare, and other essential federal programs.” The Democratic staff of the Senate Finance Committee has since launched its own investigation into oversight of these incentives.

The IRS has acknowledged the GAO’s recommendations and reports taking steps to address the issues, including establishing an annual data request protocol with Puerto Rico’s treasury officials.

The incentives, created in 2012 under former Governor Luis Fortuño to stimulate economic growth, apply exclusively to newcomers who meet specific requirements. Known locally as Acts 20 and 22, these programs have faced significant criticism on the island, where over 40% of the 3.2 million residents live in poverty. Local officials frequently cite these tax breaks as contributing factors to rising housing costs and economic inequality.

The export services program (Act 20) offers businesses a reduced 4% corporate tax rate and complete exemption from taxes on dividends or profit distributions. The individual investors program (Act 22) targets wealthy relocators with 100% exemption on dividends, interest, and long-term capital gains.

Defenders of the incentives point to a 2019 study commissioned by Puerto Rico’s Department of Economic Development and Commerce, which claimed the programs created more than 36,200 jobs and generated over $2.5 billion in investments. A 2024 follow-up study estimated that in 2022, incentive recipients established more than 1,000 businesses and paid over $200 million in taxes and donations, against a government cost of $184 million in forgone revenue.

However, Puerto Rico’s Treasury Department has calculated that between 2020 and 2026, the government will forgo approximately $4.4 billion due to individual investor incentives and $1.8 billion from export service business incentives.

The GAO observed that “Puerto Rico’s economy has shown little or no growth” since the incentives began in 2012, though it acknowledged the difficulty in determining what economic conditions might have been without them. The report noted that major natural disasters—including hurricanes, earthquakes, and the COVID-19 pandemic—have significantly impacted economic indicators.

In response to growing concerns, Puerto Rico has recently strengthened compliance requirements for wealthy transplants, including doubling the mandatory annual donation to nonprofit organizations to $10,000.