The U.S. Government Accountability Office released an audit warning that Puerto Rico’s tax incentives for wealthy newcomers could cost the federal government and territory hundreds of millions of dollars annually and that some recipients may not be meeting federal tax obligations. The GAO identified IRS data shortfalls, limited prioritization of high-wealth audits, and weak follow-up on residency referrals. Puerto Rico’s studies report investment and job gains, but foregone revenue and unclear net benefit — complicated by recent disasters — keep the programs politically contested.
GAO Audit Flags Oversight Gaps in Puerto Rico’s Tax Breaks for Wealthy Americans
FILE - A Puerto Rican national flag flies in front of the Capitol building in San Juan, Puerto Rico, July 29, 2015. (AP Photo/Ricardo Arduengo, File)
A new audit from the U.S. Government Accountability Office (GAO) is putting Puerto Rico’s tax incentive programs — which have attracted thousands of wealthy Americans over more than a decade — under renewed scrutiny. The GAO warned that exemptions tied to these programs could total hundreds of millions of dollars annually and urged the Internal Revenue Service (IRS) to strengthen oversight because some beneficiaries “may not be meeting their federal tax obligations.”
Key Findings
The GAO audit, requested by House Democrats in July 2023 and published this week, found that from 2012 through 2024 Puerto Rico issued more than 5,800 resident investor incentive decrees and nearly 3,900 export service business decrees. The majority of resident investors originated from California, followed by Florida, New York and Texas.
IRS Oversight Gaps
The report identifies several problems in federal oversight, including incomplete data sharing, limited IRS prioritization of high-wealth audits, and communication gaps between the IRS and Puerto Rican officials. Until recently, the IRS could not obtain complete lists that included Social Security numbers for people claiming the investor incentive — a critical element for verifying federal tax compliance — and had not pursued follow-up for many referrals from Puerto Rico.
Example: Puerto Rican officials flagged 179 taxpayers in August 2023 who lacked adequate proof of residency. According to the GAO, an IRS reviewer examined only a few of those referrals and concluded they did not require prioritization.
Political Response
Lawmakers on both sides of the debate criticized the programs and the oversight gaps. Rep. Jared Huffman (D-Calif.) said cuts to IRS capacity after the prior administration left “barely anyone” to verify compliance. Rep. Alexandria Ocasio-Cortez argued the exemptions are worsening wealth inequality on the island and depriving the federal government of revenue for Social Security, Medicare and other programs.
What the Incentives Are
Created in 2012 under then-Gov. Luis Fortuño, the incentives target newcomers who meet residency and other requirements. The export services law, often called Act 20, provides advantages such as a 4% corporate tax rate and a 100% exemption on dividends and profit distributions. The individual investor law, commonly known as Act 22, offers a 100% exemption on dividends, interest and long-term capital gains for qualifying residents who relocate to Puerto Rico.
Economic Impact And Debate
Puerto Rico’s government-commissioned studies report measurable benefits: a 2019 analysis found more than $2.5 billion in investments and over 36,200 jobs linked to the programs, while a 2024 estimate said 2022 recipients started more than 1,000 businesses and paid over $200 million in taxes and donations while the incentives cost the territory $184 million that year. Puerto Rico’s Treasury estimates roughly $4.4 billion in forgone revenue from individual investor incentives and $1.8 billion from export service incentives between 2020 and 2026.
However, the GAO noted that Puerto Rico’s economy has shown little or no growth since 2012 and stressed it is impossible to know exactly how the economy would have performed without these incentives. The analysis also cautioned that Puerto Rico’s recovery has been complicated by two major hurricanes, a string of earthquakes and the COVID-19 pandemic.
Next Steps
The GAO made recommendations to improve IRS oversight. The IRS told GAO it agrees with those recommendations and has begun steps such as coordinating with Puerto Rico’s treasury officials to request annual data. Puerto Rico has also tightened local compliance and reporting rules for beneficiaries, including raising the mandated annual charitable donation to $10,000.
Bottom line: The GAO audit underscores a tension at the heart of Puerto Rico’s incentive strategy — while government studies point to investment and job gains, federal auditors and some lawmakers question whether the programs are sufficiently monitored and whether they deliver broad-based benefits commensurate with the tax revenue foregone.
