The Legal Issue: Act 60 and Its Limits
Puerto Rico’s Act 60 offers generous tax exemptions on income, dividends, interest, and capital gains to Americans who establish bona fide residency on the island. Roughly 3,000 people are approved beneficiaries, though how many currently claim exemptions remains unclear. The allure is obvious—relocate and potentially pay zero federal income tax on substantial investment gains.
But the program has critical guardrails. Treas. Reg. § 1.937-2(f)(1)(iii)(B) provides that gains from dispositions of appreciated property within ten years after becoming a bona fide Puerto Rico resident are generally treated as non-Puerto Rican-source income. Put simply, if a taxpayer accumulated capital gains before moving to Puerto Rico and sold that property within ten years, a portion of those gains remains subject to U.S. federal income tax. Puerto Rico’s own Departamento de Hacienda has confirmed this interpretation. This “ten-year rule” exists to prevent taxpayers from relocating solely to cash out pre-existing gains tax-free. Despite these clear limitations, allegations have emerged that some tax professionals advised clients they could shelter pre-relocation built-in gains from federal taxation—precisely what the regulations prohibit.
Senator Wyden’s Letter to the IRS
On April 29, 2026, Senator Ron Wyden, Ranking Member of the Senate Finance Committee, sent a letter to the IRS’s Chief Tax Compliance Officer formally referring concerns about “inaccurate” legal opinions provided by two tax attorneys who allegedly helped ultra-wealthy clients avoid more than $100 million in federal taxes through the misuse of Act 60.
The letter alleges that at least one taxpayer has already pleaded guilty to tax fraud for misusing Act 60 incentives to evade taxes on a $30 million gain from the sale of Tesla Inc. stock. The IRS later advised one of the attorneys—identified as “Attorney 1” in the indictment—that “both positions in his opinion letter were wrong.” The letter also highlights a billionaire, who became a Puerto Rico resident in 2022, and allegedly used an opinion from the attorneys to avoid federal taxes on partnership asset sales generating more than $1 billion in capital gains.
Senator Wyden’s letter formally refers six concerns to the IRS, including a review of the accuracy of all legal opinions issued by the two attorneys related to Act 60, Sections 933 and 937, and whether those opinions inaccurately advised that pre-relocation gains could be exempt from federal tax. The IRS is also asked to examine how much income these investors treated as exempt Puerto Rico source income, and whether their returns appropriately differentiated pre- and post-relocation gains.
The two attorneys are reportedly the subject or target of a criminal investigation regarding their Act 60 advisory work. The U.S. Attorney for the Southern District of Florida has issued dozens of subpoenas to tax preparers and financial professionals with Puerto Rico-based clients.
What This Means Going Forward
This convergence of congressional oversight, IRS enforcement, and DOJ criminal investigation represents a watershed moment for Act 60 tax planning. The IRS has committed to devoting more audit and enforcement resources to this area, and its Large Business & International division has an active campaign targeting Act 60 abuses. For practitioners and taxpayers alike, there are several critical observations.
First, reliance on a legal opinion may not shield a taxpayer from civil penalties or criminal exposure if the underlying position is wrong. Recent enforcement actions demonstrate that the government is willing to pursue criminal charges even where the taxpayer obtained professional advice. Second, Senator Wyden sees the Treasury Regulations’ ten-year rule and sourcing rules under Sections 933 and 937 as not ambiguous, rather they are clear guardrails that the government intends to enforce aggressively. Third, taxpayers who have taken Act 60 positions involving appreciated assets acquired before relocating to Puerto Rico should proactively review their filings and the opinions they relied upon. The window for voluntary disclosure or amended returns may be narrowing as enforcement activity intensifies.
As such, investors—and their advisors—should take this moment seriously. Taxpayers facing potential exposure in this area should be cognizant of these issues and what this means going forward.
