A whistleblower claims that the Internal Revenue Service has not done enough to stop the exploitation of a Puerto Rico tax break, The New York Times reported.
According to a letter written by an IRS insider, the agency’s three-year campaign to uncover abuse of a tax benefit has failed to make much headway. Fewer than 1% of beneficiaries have been audited, yielding no taxes, the whistleblower said.
“My understanding is that no assessments have been made by any office nationwide for a campaign that has been open for three years,” the letter said.
The NYT-reviewed document has sparked a Senate investigation, and lawmakers are now urging the enforcement campaign to pick up speed.
The IRS’ high-profile operation centers on a 2012 tax break that allows new Puerto Rican residents to not pay local taxes on investment income made when residing on the island. Such benefits are common on the island territory, offered to entice wealthier Americans and corporations to move there.
While on the surface this benefit would seem easy to apply — it’s chiefly determined by where the investor lives — complications arise when an investment made outside of Puerto Rico leads to a profit after the residents move to the island.
For instance, if a business was started in the mainland US and sold after its owner settled on the island, the tax benefit should only apply for the years lived in Puerto Rico. However, concerns have risen that investors are ignoring this and exempting the entirety of their profits.
The IRS opened its probe into the issue after the 2020 indictment of Gabriel Hernandez, an accountant accused of offering to help wealthy Americans exploit the 2012 tax break, Bloomberg reported. Hernandez has pleaded not guilty.
However, according to the whistleblower’s letter, few enforcement actions have actually been taken against those who may be abusing the benefit.
For instance, the IRS will typically send out “soft letters” to any scrutinized beneficiaries, encouraging them to voluntarily fix any potential issue with their taxes. Yet, the agency hasn’t issued any soft letters, the whistleblower said.
“This is completely absurd in light of the amount of tax dollars at issue,” the insider wrote.
In an interview with NYT, IRS Commissioner Danny Werfel acknowledged that no soft letters were sent, but highlighted the dozens that have been audited. He also said that the campaign was still in an early phase and that momentum is growing after the agency received $80 billion in new funding from the 2022 Inflation Reduction Act.
“We’re still coming out of our period of underinvestment, and we are still building muscle that atrophied,” IRS commissioner Danny Werfel told NYT.
