The IRS failed to monitor Puerto Rico’s huge tax breaks, a whistleblower claims
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The IRS investigation into the abuse of a tax advantage in Puerto Rico has made little progress, a whistleblower said.
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In a letter obtained by The New York Times, the insider states that less than 1% of beneficiaries have been audited.
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The tax relief allows new residents of Puerto Rico to be exempt from local capital gains taxes.
A whistleblower claims that the U.S. Internal Revenue Service (IRS) did not do enough to stop the exploitation of a tax break in Puerto Rico, the New York Times reported.
According to a letter from an IRS insider, the agency’s three-year campaign to uncover abuse of tax benefits has made no significant progress. Less than one percent of beneficiaries have been audited, resulting in no taxes, the whistleblower said.
“To my knowledge, no office in the entire country has provided an assessment for a campaign that has been running for three years,” the letter said.
The document, reviewed by The New York Times, has sparked a Senate investigation, and lawmakers are now pushing to speed up the enforcement campaign.
At the heart of the IRS’s high-profile operation is a 2012 tax break that allows new Puerto Rican residents to avoid paying local taxes on capital gains they make while on the island. Such breaks are common on the island territory and are designed to entice wealthier Americans and companies to move there.
While this benefit seems easy to apply at first glance – it depends primarily on where the investor lives – complications arise when an investment made outside of Puerto Rico results in a profit after residents move to the island.
For example, if a company was founded in the mainland United States and sold after its owner settled on the island, the tax benefit should only apply to the years he spent in Puerto Rico. However, there are concerns that investors will ignore this and exempt all their profits from tax.
The IRS launched its investigation into the issue after charges were filed in 2020 against Gabriel Hernandez, an accountant accused of helping wealthy Americans take advantage of the 2012 tax break, Bloomberg reported. Hernandez has pleaded not guilty.
However, according to the whistleblower’s letter, little action has been taken against those who may be abusing these benefits.
For example, the IRS typically sends “soft letters” to all beneficiaries under review, asking them to voluntarily correct any tax problems. However, the agency did not send any soft letters, the whistleblower said.
“Given the amount of taxpayer money involved, this is completely absurd,” the insider wrote.
In an interview with the NYT, IRS Commissioner Danny Werfel acknowledged that no soft letters have been sent out but highlighted the dozens that have been reviewed. He also said the campaign is still in its early stages and that momentum is building after the agency received $80 billion in new funding from the Inflation Reduction Act of 2022.
“We are still coming out of our period of underinvestment and we are still building the muscles that have atrophied,” IRS Commissioner Danny Werfel told the New York Times.
Read the original article on Business Insider
