Wyden Puerto Rico Act 60 IRS Referral May 2026: Wyden Sends Puerto Rico Act 60 Probe to IRS

The short version is this. In May 2026, Senator Ron Wyden, the ranking Democrat on the Senate Finance Committee, sent a referral to the IRS asking the agency to take a harder look at people who claim Puerto Rico Act 60 tax benefits. The wyden puerto rico act 60 irs referral may 2026 is not a new law and it does not change the tax code. It is a political signal that pushes an enforcement agency to allocate examination resources toward a specific population, namely mainland Americans who moved to Puerto Rico, became bona fide residents, and now exclude large chunks of income from federal tax. If you took the Act 60 deal, you should care because referrals like this move audit selection. The IRS already ran a compliance campaign on this group starting in 2021, and a Senate referral adds fuel to it. None of this is partisan from our chair. It is just how enforcement priorities get set in practice.

Let me back up and explain what Act 60 actually is. Puerto Rico consolidated two older laws, Act 20 and Act 22, into what is now the Act 60 incentives code. Act 20, the old export services piece, lets a Puerto Rico business pay a 4 percent corporate rate on income from services exported off the island. Act 22, now the Individual Resident Investor chapter, gives a qualifying individual a 0 percent rate on Puerto Rico source capital gains, interest, and dividends earned after the person becomes a resident. Those are genuine, legal incentives granted by the Puerto Rico government under a grant decree, and thousands of people have used them properly. The catch that Wyden is poking at sits in federal law, not Puerto Rico law.

Here is the federal mechanism. Internal Revenue Code section 933 says a bona fide resident of Puerto Rico can exclude Puerto Rico source income from a federal Form 1040. The phrase that does all the work is Puerto Rico source. Capital gain on a stock you bought years before you ever moved is generally not Puerto Rico source for the appreciation that built up while you lived in New York or California. A consulting fee you earn for work physically performed in Manhattan is United States source, not Puerto Rico source, even if your firm has a San Juan address. Wyden’s concern, and the IRS concern that predates him, is that some people stretch the sourcing rules and exclude mainland income that was never eligible. You can read the territory residency framework on the IRS page covering individuals living or working in a US territory, which lays out IRC section 937 and the bona fide residence tests.

A quick worked example. Say you moved to Dorado in March 2024 holding 10,000 shares of a tech stock you bought in 2015 at 20 dollars. You sell in 2026 at 220. Your total gain is 2 million dollars. The chunk that accrued before your move date is not automatically Act 22 exempt. Special rules under IRC 937 and the related regulations require you to allocate gain on certain property owned before residency. People who treat the whole 2 million as exempt are exactly who an examiner wants to find, and they are the headline cases a referral like this is meant to surface.

We see this every year. A client comes in convinced that the grant decree from Puerto Rico controls their federal return. It does not. The decree governs your Puerto Rico tax rate. Federal sourcing and IRC 933 govern what the IRS will let you exclude. Two separate governments, two separate rulebooks. The edge case worth flagging is the part year move. In your first year you are a dual status filer, and the exclusion only reaches income after your residency start date. If you want a sober read on your own facts, our tax strategy consulting team handles exactly this kind of cross border residency question. Start with a conversation at /new-client-inquiry/ before you assume the referral does not touch you.

Bona fide residency is the whole ballgame, so here is it the way I would across my desk. IRC section 933 grants the income exclusion, but you only get there if you first qualify as a bona fide resident under IRC section 937. Section 937 sets three tests you have to clear for the tax year, and all three matter. They are the presence test, the tax home test, and the closer connection test. Fail any one and the exclusion can collapse, taking your Act 60 federal benefit with it. This is the exact chain the IRS pulls on when it works a Puerto Rico file.

Test one is the presence test. The default rule asks you to be physically present in Puerto Rico for at least 183 days during the tax year. There are alternate ways to satisfy presence if you do not hit 183 days, such as spending no more than 90 days in the United States during the year, or having no significant connection and limited US presence, but the 183 day path is the clean one and the one examiners understand fastest. Track your days. Keep a calendar, boarding passes, and credit card geography. The IRS asks for this in an exam and a vague memory does not survive scrutiny. I tell clients to treat the day count like a time sheet that a stranger will audit, because that is what happens.

Test two is the tax home test. Your tax home, meaning your main place of business or employment, has to be in Puerto Rico and not outside it for the year. If you fly back to your old New York office two weeks a month and that is where your real work happens, an examiner will argue your tax home never left New York. Test three is the closer connection test. Even with presence and a Puerto Rico tax home, you fail if your closer connection, your home, family, belongings, banks, doctors, social ties, points back to the mainland. The IRS reads these the way a customs officer reads a story that does not add up. They want your life, not just your mailing address, to live in Puerto Rico.

Now the form that triggers all of this. When you begin or end bona fide residency in a territory you file Form 8898. The IRS explains it on the about Form 8898 page, and the filing mechanics and bona fide residence detail live on the Form 8898 bona fide residence page. You file Form 8898 if you have worldwide gross income over 75,000 dollars for the year you move. Skip it and the penalty is 1,000 dollars, and worse, you have handed the IRS a reason to question whether you ever really established residency.

A worked example. You move on June 1, 2026. For 2026 you are a dual status filer. From January through May you are a regular US resident taxed on everything. From June forward, once you meet the section 937 tests, IRC 933 lets you exclude Puerto Rico source income earned after the start date. Suppose you earn 300,000 in Puerto Rico source consulting after June and 250,000 in US source income before June. Only the 300,000 has a shot at exclusion, and only if it is genuinely Puerto Rico source for services performed on the island.

We see this every year. People count days sloppily, then act surprised when the presence test fails by a week. The edge case is the year you leave. Ending residency also triggers a Form 8898 and the IRS watches departures because some people try to harvest gains the day before they leave the island. Bona fide residency is a year by year status, not a permanent badge. If you are unsure which year you actually qualified, our individual tax return group reconstructs the timeline and files it right. Bring it to /new-client-inquiry/ early, not after a notice arrives.

Because that is where the money and the abuse risk sit. The whole value of the Act 60 individual deal comes from the 0 percent Puerto Rico rate on certain income combined with the IRC 933 federal exclusion. The temptation, and the IRS knows it, is to relabel income that is really United States source as Puerto Rico source so it qualifies for both. The agency launched a formal compliance campaign on Puerto Rico Act 22, now Act 60, individuals back in 2021, and Wyden’s May 2026 Puerto Rico Act 60 IRS referral piles onto an effort already in motion. The examiners are not chasing the existence of the benefit. They are testing whether the income you excluded was ever eligible in the first place.

The technical heart of it is sourcing. Under IRC 933 you exclude Puerto Rico source income only. Several common income types create friction. Capital gains on property you held before moving carry a pre move portion that is generally not exempt, because special rules under IRC 937 and its regulations allocate appreciation to your mainland period. Compensation for services is sourced to where you physically perform the work, so a fee for a deal you closed in Chicago is US source even if billed through a San Juan entity. Investment management or consulting income from US clients raises questions about where the value was actually created. You can see the official residency and sourcing framework on the IRS page about individuals living or working in a US territory and the detailed sourcing rules in Publication 570, the tax guide for individuals with income from US possessions.

Here is a worked example that shows the trap. A fund manager moves to Puerto Rico in 2025 and sets up an Act 20 services company. The company invoices US hedge funds for advisory work. The manager flies to New York 12 days a month to meet those funds and do the actual analysis there. He reports 4 million in fees as Puerto Rico source and pays the 4 percent rate, then excludes his salary federally under IRC 933. An examiner pulls his calendar, sees the New York pattern, and reclassifies a large slice as US source services income subject to full federal tax plus interest and possibly penalties. The structure looked clean on paper. The facts on the ground told a different story, and facts are what an exam runs on.

We see this every year, usually in two flavors. First, people who excluded the full gain on pre move stock without allocating the pre residency appreciation. Second, people whose work clearly happens on the mainland but whose paperwork says Puerto Rico. Both are exactly what the campaign and the referral target. The edge case to watch is the Act 20 business with no real Puerto Rico substance, no local employees, no local office, no genuine work performed on the island. The IRS and Puerto Rico both have substance expectations, and a hollow entity is a weak spot that an examiner finds quickly once the calendar comes out.

So what does an examiner actually pull. Day count records, the Form 8898, the grant decree, brokerage statements showing purchase dates, client locations, travel logs, and the sourcing position on every large item. If the answer to where was the work done or when did the gain accrue points to the mainland, the exclusion gets adjusted. None of this means Act 60 is a trap. It means the benefit is only as strong as your sourcing is honest. Think about it from the examiner side for a moment. They are not trying to disprove that you live in Puerto Rico, and they are not arguing that the island lacks the power to grant a 0 percent rate. They are asking one narrow question over and over, which is whether each dollar you excluded was Puerto Rico source under the federal rules. That is a question of facts and records, and it is winnable when your file is clean and lost when it is thin. The people who get reassessed are almost never surprised by the legal rule. They are surprised that the agent actually checked their calendar and their trade confirmations against the position on the return. If you are carrying excluded items you are not sure about, our tax compliance team will pressure test them before the IRS does. Reach us at /new-client-inquiry/.

Real compliance is boring, documented, and consistent, which is exactly why it survives an exam. After the wyden puerto rico act 60 irs referral may 2026, the smart move is not to panic and unwind your move. It is to make sure your file would hold up if a revenue agent opened it tomorrow. That means three things done well. Prove your residency, source your income correctly, and file every form the rules require, on time, with backup. Do those and a referral is just noise. Skip them and a referral becomes your problem.

Start with residency proof. The section 937 tests are factual, so build a factual record. Keep a contemporaneous day count showing at least 183 days in Puerto Rico, supported by flight records, lease or deed, utility bills in your name, a Puerto Rico drivers license, local bank accounts, where your kids go to school, where your doctors are, and where your cars are registered. Your tax home should obviously be Puerto Rico, meaning your real work happens there. Your closer connection should point to the island across the board. File Form 8898 for the year you establish residency if your worldwide gross income tops 75,000 dollars, and remember it is filed by itself, not stapled to your 1040. The IRS lays this out on the about Form 8898 page.

Next, source income honestly. Walk through every material item and ask the plain question, where did this come from. For services, where did you physically do the work. For capital gains, when did you buy and how much appreciation predates your move. For dividends and interest, what entity paid it and is it genuinely Puerto Rico source. Publication 570 is the playbook here, and you can pull it from the Publication 570 page. If a gain has a pre move portion, report that portion as taxable on your federal return. Paying a little federal tax on the pre residency slice is far cheaper than defending a 100 percent exclusion you cannot support, and it makes the rest of your return look credible.

A worked example of clean compliance. You moved July 1, 2025 with 5,000 shares bought in 2018 at 50, now worth 250. You sell in 2026 for a 1 million dollar gain. You compute the appreciation through your residency start date using the allocation rules, find that 600,000 accrued before the move, and report that 600,000 as taxable US gain while excluding the 400,000 that accrued as a Puerto Rico resident. You also keep your brokerage statements and the move date documentation in the file. That return tells a coherent story. An examiner reads it and moves on, because there is nothing to argue about.

We see this every year. The clients who get hurt are not the aggressive ones who got caught, they are the sloppy ones who were entitled to most of the benefit but kept no records, so they cannot prove what they claimed. The edge case is the dual status first year, where half the year is ordinary US filing and half is post residency. Get the split wrong and the whole return looks unreliable. One more habit that pays off is a short written memo in your file each year explaining your residency facts and your sourcing calls for the big items. It does not have to be fancy. A page that says here is where I worked, here are my day counts, here is how I split the pre move gain, with the supporting documents attached, turns a frightening exam into a routine one. Agents respond well to a taxpayer who can hand them an organized story rather than a shoebox. Build that memo while the facts are fresh, not three years later when memories have faded and the broker no longer keeps the old statements online. If you want your Act 60 position reviewed and your filings tightened before any notice, our tax compliance team does exactly this work. Start at /new-client-inquiry/.

Your audit risk is real but manageable, and it scales directly with how aggressive your sourcing was. Let me be straight. The IRS has had an open compliance campaign on Puerto Rico Act 22, now Act 60, individuals since 2021, and the Wyden’s May 2026 Puerto Rico Act 60 IRS referral raises the political temperature. That combination means this population is selected for examination at a higher rate than a typical 1040 filer. But selection is not the same as a bad outcome. People with honest sourcing and a documented residency file walk out fine. People who excluded mainland income they were never entitled to exclude are the ones who owe tax, interest, and possibly penalties.

What does the IRS look for when it opens one of these. First, residency. Did you actually meet the IRC 937 presence, tax home, and closer connection tests, and can you prove it. They pull day counts, travel records, and the Form 8898. Second, sourcing. Did you correctly split pre move and post move capital gains, and is your services income sourced to where you physically worked. Third, substance, especially for Act 20 service companies. Is there a real business in Puerto Rico with real activity, or is it a mailbox. The credit and residency framework they apply is summarized on the IRS page for tax credits and bona fide residents of United States territories, and the residency tests sit on the US territory page.

A worked example of the dollars at stake. Suppose you excluded 1.5 million of capital gain, and on exam the IRS determines 900,000 of it accrued before your move and was never Puerto Rico source. At a 23.8 percent federal rate on that 900,000, the tax is roughly 214,000 dollars. Add interest running from the original due date and a possible accuracy related penalty of 20 percent under IRC 6662, and the bill climbs fast. That is the real downside. It is not jail for the ordinary taxpayer who made a sourcing mistake, it is a large reassessment plus interest. The cases that turn criminal involve fabricated residency or sham entities, which is a different and rarer animal, and not where most honest filers ever land.

We see this every year. The most common mistake is treating the Puerto Rico grant decree as if it answers federal questions. It does not. The decree controls your Puerto Rico rate. Federal sourcing and IRC 933 control your federal exclusion, and the IRS will test the federal side regardless of what your decree says. The second most common mistake is poor day counting, where someone is sure they hit 183 days but their boarding passes say 171. The edge case worth naming is the person who is entitled to the benefit but underdocuments it. They lose not because they were wrong, but because they cannot prove they were right, and the burden in these exams sits on the taxpayer.

So how worried should you be. If your move was genuine, your days are documented, your income is honestly sourced, and your Form 8898 was filed, you are in good shape and a referral does not change that. If any of those legs is wobbly, fix it now, because amending or shoring up your file before a notice arrives is far better than scrambling after. One thing I will not do is tell you the benefit is dead or that you should flee the island. For people who genuinely relocated and source their income correctly, Act 60 remains a legitimate planning result, and a referral does not strip it away. What a referral does is raise the odds that someone looks, so the entire game becomes documentation and consistency. Keep your day counts current, file your Form 8898 on time, source every large item with a paper trail, and split your pre move gains the way the regulations require. Do that and you sleep fine regardless of what any senator sends to the IRS. Our tax strategy consulting team reviews Act 60 positions and audit readiness regularly. If a referral has you wondering where you stand, bring your facts to /new-client-inquiry/ and we will give you a straight read.