5 Common Act 60 Mistakes That Lead to IRS Audits

Why Does Act 60 Require Such Precise Execution?

Puerto Rico's Act 60 is one of the most legitimate and effective tax strategies available to U.S. persons. The problem is that its benefits are so attractive that some people attempt to claim them without genuinely meeting the requirements. The IRS knows this, and enforcement has increased significantly in recent years. Here are the five most common mistakes that put Act 60 participants in the IRS's crosshairs.

Mistake #1: Are You Actually Spending 183+ Days in Puerto Rico?

This is the most fundamental requirement and the most frequently violated. Bona fide Puerto Rico residency requires spending at least 183 days per year on the island. Some participants attempt to count partial days, days spent traveling through, or days spent in nearby destinations as Puerto Rico days. The IRS is sophisticated about identifying this, reviewing phone records, card transactions, and travel histories.

The fix: Track every day meticulously. Use a dedicated calendar app, save all receipts from Puerto Rico, and document your presence with banking transactions, utility bills, and receipts from local businesses.

Mistake #2: Is Your Primary Life Still on the U.S. Mainland?

Some participants own a Puerto Rico condo but spend most of their emotional, social, and economic life on the mainland. Their children attend school in Florida, their spouse's job is in New York, their friends and family are in California. The IRS looks at the full picture of your life to assess the "closer connection" test — not just your day count.

The fix: Genuinely shift your life's center of gravity to Puerto Rico. Update your driver's license, voter registration, bank accounts, and professional affiliations to Puerto Rico.

Mistake #3: Did You Sell Appreciated Assets Before Moving?

This is the most expensive mistake. Selling appreciated assets — especially crypto — before establishing genuine Puerto Rico residency triggers full federal capital gains tax on all the pre-move appreciation. The 0% Act 60 rate only applies to gains that accrue during your Puerto Rico residency.

The fix: Do not sell anything until after you are a genuine Puerto Rico resident with a valid decree. Plan the timing of asset sales with qualified tax counsel.

Mistake #4: Is Your Business Structured Correctly for Act 60?

For Chapter 3 (export services) decree holders, the services must be exported from Puerto Rico to clients outside the island. Running a business that serves primarily U.S. clients from a Puerto Rico address — without genuinely operating there — does not qualify. The IRS and Puerto Rico authorities look at where the work is actually performed.

The fix: Genuinely operate your business from Puerto Rico. Have Puerto Rico-based employees, a real office, and documented Puerto Rico operations.

Mistake #5: Are You Making the Required $10,000 Charitable Donation?

Chapter 2 decree holders are required to make an annual $10,000 charitable contribution to qualifying Puerto Rico nonprofits. Many people forget or deprioritize this requirement. Non-compliance can jeopardize the decree.

The fix: Calendar this obligation annually. Maintain donation receipts. Choose qualifying organizations — not all Puerto Rico nonprofits qualify for Act 60 purposes.