GAO-26-107225, "Puerto Rico: IRS Should Improve Oversight of Taxpayers Claiming Exemption from Federal Taxes" (Dec. 8, 2025)

Summary

This is GAO-26-107225, a December 2025 GAO report to congressional requesters on Puerto Rico's resident investor (Act 22) and export service business (Act 20) tax incentives. It states that in 2021 there were approximately 2,200 recipients of the resident investor incentive, and that almost 4,000 taxpayers received the business export service tax incentive from 2012 through 2024. GAO reports that IRS has no documented plan to routinely acquire the most current data from Puerto Rico and did not pursue referrals from Puerto Rico government officials. GAO makes three recommendations to IRS, and IRS agreed with all three.

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PUERTO RICO:

Report to
Congressional Requesters

December 2025

GAO- 26-107225

United
States Government Accountability Office

Highlights

A report to congressional
requesters.

For more information, contact: James
R. McTigue, Jr. at McTigueJ@gao.gov .

What GAO Found

In 2021, the most current year for which GAO had complete
data, there were approximately 2,200 recipients of the Puerto Rico resident
investor tax incentive. GAO’s analysis found a significant decrease in the
average federal taxable income and federal taxes paid by this population
between the 5 years prior to and up to 5 years after moving to Puerto Rico (see
figure). GAO’s analysis found that the decrease in federal tax revenue in
aggregate could amount to hundreds of millions of dollars per year.

Figure: Average
Total Federal Taxable Income and Total Federal Taxes Paid by Taxpayers
Receiving the Puerto Rico Resident Investor Tax Incentive

Note: Dollar amounts are inflation-adjusted 2023 dollars .

Additionally, from 2012 through 2024, almost 4,000
taxpayers received Puerto Rico’s business export service tax incentive. The
effect of the resident investor and business export service incentives on
Puerto Rico’s economy is difficult to isolate as the evidence is mixed on the
overall costs and benefits. This is, in part, due to recipients representing a
small fraction of Puerto Rico’s population. Some economic studies undertaken
for the Puerto Rico government suggest an increase in economic activity and employment
related to the tax incentives while local perspectives and migration data
suggest mixed results.

In 2021, the Internal Revenue Service (IRS) announced a
compliance initiative, called a campaign, to address concerns that some
recipients of Puerto Rico’s resident investor incentive may not be meeting
their federal tax obligations. The campaign only recently began showing
results, in part, due to the complexity of high-income and high-wealth audits,
IRS not prioritizing the effort, and communication gaps between IRS and Puerto
Rico. Until 2025, IRS was unable to obtain complete data on taxpayers claiming Puerto
Rico’s resident investor incentive with Social Security numbers to help ensure
compliance with federal tax laws. Further, IRS has no documented plan to
routinely acquire the most current data from Puerto Rico going forward.
Obtaining such data regularly would improve IRS’s ability to ensure compliance.

Additionally, IRS did not pursue referrals from Puerto
Rico government officials who identified U.S. taxpayers whom officials could
not confirm met Puerto Rico’s residency requirement. IRS also does not have a
plan to prioritize any future referrals. GAO analyzed these referrals along
with IRS data and identified taxpayers with indicators of potential
noncompliance with federal tax law, which GAO shared with IRS. Establishing
procedures to review cases of potential noncompliance identified by Puerto Rico
government agencies could help IRS improve federal tax compliance.

Why GAO Did This
Study

In 2012, Puerto Rico enacted the resident investor (Act
22) and export service business (Act 20) tax incentives to encourage relocation
to and investment in Puerto Rico. Federal law generally exempts residents of
Puerto Rico from federal income tax on income sourced from Puerto Rico. IRS is
responsible for ensuring that taxpayers claiming Puerto Rico’s resident
investor incentive are meeting their federal tax obligations.

GAO was asked to review the Puerto Rico resident investor
and export service business tax incentives. This report (1) describes the
population receiving tax incentives, (2) describes selected economic effects of
these tax incentives on Puerto Rico’s economy, and (3) assesses IRS efforts to
ensure compliance among U.S. persons relocating to Puerto Rico and claiming
residency.

GAO analyzed IRS and Puerto Rico documentation and data
and interviewed relevant officials. GAO also interviewed local officials,
economic development firms, and stakeholder groups.

What GAO Recommends

GAO is making three recommendations to IRS, including that
it establish procedures to regularly obtain data on all taxpayers claiming
Puerto Rico’s resident investor incentive and procedures to review cases of
potential noncompliance referred to IRS by Puerto Rico government agencies. IRS
agreed with all three of the recommendations.

Abbreviations

AGI | adjusted gross income
DDEC | Puerto Rico Department of
 Economic Development and Commerce (known by its abbreviation in Spanish)
GDP | gross domestic product
GNP | gross national product
Hacienda | Puerto Rico Department of
 Treasury (known by its name in Spanish)
IRS | Internal Revenue Service
SSN | Social Security number

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Letter

December 8, 2025

The Honorable Jared Huffman Ranking Member Committee on Natural Resources House of Representatives

The Honorable Alexandria Ocasio-Cortez House of Representatives

The Honorable Ritchie Torres House of Representatives

The Honorable Nydia M. Velázquez House of Representatives

Taxpayers moving to Puerto Rico may be eligible for
exemptions from both federal and Puerto Rico taxes. Specifically, federal law
generally exempts residents of Puerto Rico from federal income tax on income
sourced from Puerto Rico. In 2012, Puerto Rico enacted resident investor and
export service business tax incentives to encourage relocation to and
investment in the commonwealth. These incentives give eligible residents of
Puerto Rico preferential tax treatment on investment income. [1] The resident investor incentive could
be particularly appealing to high-net-worth individuals whose income is
primarily based on investments, such as interest, dividends, and capital gains.

The Internal Revenue Service (IRS) is responsible for
ensuring that taxpayers receiving Puerto Rico’s resident investor incentive are
meeting their federal tax obligations. In 2021, IRS implemented a compliance
initiative—called a campaign. In May 2024, former IRS Commissioner Werfel
publicly acknowledged the campaign’s initial progress was slow. In addition, an
anonymous person who identified themself as an IRS employee alleged in a letter
to members of Congress that mismanagement of the campaign led to a lack of
results. In summer 2024, Democratic staff of the U.S. Senate Committee on
Finance opened its own investigation into oversight of the exemptions.

You asked us to review the Puerto Rico resident investor
and export service business tax incentives. This report (1) describes the
population of individuals and businesses receiving Puerto Rico’s resident
investor and export service business tax incentives, (2) describes selected
economic effects of Puerto Rico’s resident investor and export service business
tax incentives on Puerto Rico’s economy based on available data, and (3)
assesses IRS efforts to ensure compliance among U.S. persons relocating to Puerto
Rico and claiming residency.

To address these objectives, we reviewed documents
produced by IRS and multiple government agencies in Puerto Rico. We analyzed
data from the Puerto Rico Department of Economic Development and Commerce
(known by its acronym in Spanish, DDEC), the Puerto Rico Department of Treasury
(known by its name in Spanish, Hacienda), and IRS to identify the number of
individuals holding resident investor and export service decrees. We also used
these data to identify the number of resident investor incentive recipients in
a particular tax year and to determine their average annual income and taxes
due before and after moving to Puerto Rico. We used these same data sources to
determine information such as the states from which resident investor incentive
recipients moved and the number of individuals who notified IRS that they were
moving to Puerto Rico.

We reviewed publicly available data on economic activity
and housing trends in Puerto Rico and reviewed studies of the economic effects
of the tax incentives. We also conducted site visits to Puerto Rico and
interviewed government officials, researchers, economic development firms, and
stakeholder groups about the effects of the tax incentives. Additionally, we
interviewed local officials from a nongeneralizable selection of
municipalities. We selected Aguadilla, Dorado, Rincón, and San Juan because officials
told us that a large number of resident investor incentive recipients lived in
these municipalities.

To analyze how the campaign was designed and managed, we
interviewed IRS officials, including those who manage the campaign. We also
reviewed testimonial evidence about changes to the campaign that occurred over
time, data on the number of cases opened and closed, data on the outcomes of
those cases, and steps the campaign was taking beyond audits to promote
compliance.

In addition, we met with Puerto Rico government officials
responsible for Puerto Rico tax administration, decree oversight, and
communication with IRS. We analyzed communications between IRS and the
government of Puerto Rico related to the exchange of tax data between the
agencies. We compared IRS’s actions in this area to the existing coordination
agreement between the federal government and Puerto Rico, applicable sections
of the Internal Revenue Manual, the campaign’s objectives, the rights outlined in
the Taxpayer Bill of Rights, and leading practices for enhancing interagency
collaboration. [2] We also reviewed cases of potential noncompliance identified by DDEC and have
shared the results of our analysis with IRS. A more detailed discussion of our
methodology is included in appendix I.

We conducted this performance audit from December 2023 to December
2025 in accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives.

Background

Puerto Rico Economy

Puerto Rico’s economy lags that of the United States as a
whole, with lower median incomes and overall economic growth. [3] In addition, doing business in Puerto
Rico can be more expensive compared to the mainland. One reason for the higher
expense is residential energy prices that are consistently higher in Puerto
Rico than the U.S. average (see fig. 1). Additionally, the Puerto Rico electric
grid remains unstable and residents lose power more often than any state,
according to the Financial Oversight and Management Board for Puerto Rico. [4]

Figure 1: Electricity Prices
in Puerto Rico and Nationwide, June 2014-December 2024

Historically, the U.S. federal government has provided tax
incentives specific to Puerto Rico, with the goal of promoting economic growth
in the commonwealth. This included Section 936, enacted as part, of the Tax
Reform Act of 1976, which provided eligible corporations an exemption for the
full amount of federal taxes related to income from operations in Puerto Rico. [5] Section 936 was phased out over 10
years beginning in 1996. Since then, the government of Puerto Rico has offered
several tax incentives intended to promote economic activity in the
commonwealth.

Puerto Rico Tax Incentives and the Federal Tax Exemption

The resident investor incentive and the export service
business incentive are two of Puerto Rico’s local tax incentives, originally
enacted in 2012 under Acts 22 and 20. Both incentives are now part of chapters
2 and 3 respectively of Puerto Rico’s Incentives Code, commonly known as Act
60, enacted in 2019. [6] Taxpayers may receive both the Puerto Rico incentives and a federal tax
exemption on Puerto Rico sourced income, if they meet the requirements for
both, thereby increasing the tax advantage of relocating to Puerto Rico.

Puerto Rico Resident Investor Incentive

Under the law establishing the resident investor
incentive, DDEC issues decrees to eligible individuals that provide the
taxpayer with favorable rates on their Puerto Rico income taxes if that taxpayer
relocates to Puerto Rico (see fig. 2). [7] These decrees serve as individual contracts between the taxpayer and the Puerto
Rico government. Generally, the decree grants a

· 100 percent exemption from interest and dividends, as well as
certain net capital gains, accrued after moving to Puerto Rico, and

· fixed income tax rate of 5 percent on certain Puerto Rico capital
gains accrued before moving to Puerto Rico and realized after 10 years of
residency. [8]

Eligible individuals must meet annual requirements,
including moving to Puerto Rico, maintaining residency in Puerto Rico, and
filing an annual report with DDEC. Taxpayers need to live in Puerto Rico for
more than half the year (183 days) to meet Puerto Rico’s residency requirement. [9] According to one Puerto Rico
official, Puerto Rico structured its residency requirement such that taxpayers
who reside in Puerto Rico for 183 days per year would generally meet both
Puerto Rico and federal requirements. In recent years, DDEC has also required
recipients of the resident investor incentive to make an annual $10,000
donation to a nonprofit organization in Puerto Rico. [10]

Figure 2: Key Federal and
Puerto Rico Tax Benefits and Requirements Available to Resident Investor
Incentive Recipients

Puerto Rico Export Service Business Incentive

Puerto Rico offers tax incentives to businesses engaged in
export services. As with the resident investor incentive, DDEC issues decrees
to eligible businesses. The decree grants favorable rates on their Puerto Rico
tax obligations, including a 4 percent fixed income tax rate and a 100 percent
tax exemption from dividend or profit distributions.

To qualify for the Puerto Rico export service business
incentive, a business must operate through an office located in Puerto Rico and
perform services for foreign entities or individuals without a connection to
domestic business in Puerto Rico. Some examples of export service businesses
that could qualify include call centers, asset management firms, and data
centers.

Although this tax incentive is not directly related to the
resident investor incentive, many resident investor incentive recipients also
own businesses with export service decrees. [11]

Federal Tax Exemption

Federal law generally exempts bona fide residents of
Puerto Rico from federal income tax on income sourced from Puerto Rico. [12] To qualify as a bona fide resident
of Puerto Rico for federal tax purposes, taxpayers must meet a three-part test. [13] Specifically, they must

· not have a tax home outside of Puerto Rico, [14]

· not have a closer connection to the United States or to a foreign
country than to Puerto Rico, [15] and

· meet the presence test (see sidebar).

Internal Revenue Service Presence Test Taxpayers meet the federal presence test for the tax
 year if they meet one of the following conditions. · They
 were present in the territory for at least 183 days during the tax year. · They
 were present in the territory for at least 549 days during the 3-year period
 that includes the current tax year and the 2 immediately preceding tax years.
 During each year of the 3-year period, they must also be present in the
 territory for at least 60 days. · They
 were present in the United States for no more than 90 days during the tax
 year. · They
 had $3,000 or less of earned income from United States sources and were
 present for more days in the territory than in the United States during the
 tax year. · They
 had no significant connection to the United States during the tax year. Source: Internal Revenue Service. | GAO‑26‑107225

While the federal government and Puerto Rico offer
different tax benefits with different requirements, elements of the residency
requirements overlap. Taxpayers meeting the Puerto Rico resident investor
incentive requirement to reside in Puerto Rico for at least 183 days per year
would generally meet IRS’s presence test.

IRS’s Oversight of Taxpayers Claiming Puerto Rico Residency Under the
Incentive Program

IRS has no oversight authority over the resident investor
and export service business tax incentives offered by Puerto Rico’s government,
including whether a taxpayer has satisfied the residency requirements under
Puerto Rico law. However, IRS is responsible for administering and enforcing
U.S. tax law. For individuals, this includes IRS verification of compliance
with federal residency requirements that grant federal income tax exemption
from income sourced from Puerto Rico. Corporations organized under the laws of
Puerto Rico are considered foreign corporations for U.S. tax purposes and are
subject to the same oversight as other foreign corporations.

One way IRS works to improve compliance is through
compliance projects known as campaigns. IRS campaigns address a specific issue
area that IRS has identified as presenting a high risk of noncompliance. In
January 2021, IRS announced the launch of a compliance campaign to address
concerns that taxpayers receiving Puerto Rico’s resident investor tax incentive
could be:

· improperly excluding income subject to U.S. tax on an income tax
return,

· failing to file a required tax return reporting income subject to
U.S. taxes, or

· improperly reporting U.S.-sourced income as Puerto Rico-sourced
income to evade taxation.

IRS’s Puerto Rico Act 22 Campaign was one of 46 active
Large Business and International campaigns that IRS had in place as of July
2025. According to IRS, the objective of this campaign is to address
noncompliance in this area through a variety of means including examinations,
outreach, and education letters. The campaign is designed to have a role
throughout the audit process (see fig. 3).

Figure 3: Internal Revenue Service
Campaign Involvement in the Audit Process

Thousands of Individuals Received Tax Incentives to Move
to Puerto Rico

Puerto Rico Granted More than 5,800 Resident Investor and Nearly 4,000
Export Service Business Incentive Decrees from 2012 Through 2024

Resident investor decrees. Puerto Rico granted a
total of 5,852 resident investor decrees from 2012 through 2024, with the
largest number of decrees granted in 2021 (see fig. 4 below). [16] The number of decrees granted peaked
in 2021, coinciding with the increase in teleworking following the onset of the
COVID-19 pandemic. The recipients of these decrees are the taxpayers
potentially eligible to receive federal tax exemptions and Puerto Rico tax
incentives and who are the subject of IRS’s compliance campaign.

Figure 4: Annual Count of New
Resident Investor Decrees Granted, 2012-2024

Not everyone who received decrees made use of them. In
2021, there were 2,236 Puerto Rico tax returns filed with a resident investor
decree, but more than 4,200 resident investor decrees had been granted at that
time, according to data from DDEC and Hacienda. From 2021 to 2023, taxpayers
filed more than 2,200 Puerto Rico tax returns each year and 3,165 unique primary
taxpayers filed with a resident investor decree on their Puerto Rico tax
returns across the 3 years, as shown in table 1.

Table 1: Count of Puerto Rico Tax
Returns Filed with a Resident Investor Decree by Year, 2021-2023

Year | Puerto Rico returns filed with a resident
 investor decree
2021 | 2,236
2022 | 2,520
2023 | 2,302
Total unique primary taxpayers a | 3,165

Source: GAO analysis of data from the Puerto Rico Department
of Treasury. | GAO‑26‑107225

a The total is the number of unique primary
taxpayers (individuals listed as the taxpayer and not the spouse on their tax
returns) claiming the resident investor incentive across the 3 years. The total
is not the sum of the years because some taxpayers were incentive recipients
for multiple years. The analysis of total unique primary taxpayers is based on
June 2023 data. Puerto Rico updated its data in June 2025 to identify 10
additional returns across 2022 and 2023. These 10 returns are included in the
counts for those years but not included in the total number of unique primary
taxpayers. Additionally, in 2021, 2022, and 2023, Hacienda identified 156, 192,
and 444 returns, respectively, on which both the taxpayer and spouse claimed
the resident investor incentive on the same return.

DDEC can terminate a resident investor decree if it finds
that the decree holder is not meeting requirements, for example if the taxpayer
does not reside in Puerto Rico for 183 days per year. Officials noted that
while certain requirements can be remediated—for example, in some cases, the
requirement to file an annual report can be met by filing late—failing to meet
the residency requirement cannot be corrected after the fact.

All U.S. taxpayers—not just resident investor incentive
recipients—who are establishing bona fide residency and earning more than
$75,000 must file Form 8898 for that year, Statement for
Individuals Who Begin or End Bona Fide Residence in a U.S. Possession ,
with IRS. [17]

The number of individuals beginning bona fide residency
may be lower than the number of decrees granted if, for example, a decree was
not used or the resident investor incentive recipient simply did not file Form
8898 with IRS when they should have filed it. From 2012 through 2023, a total
of 3,108 individuals had filed Form 8898 with IRS indicating they were changing
their residency to Puerto Rico. In each year since 2013, more individuals have
been granted decrees than have filed Form 8898 declaring residency in Puerto
Rico (see fig. 5).

Figure 5: Annual Counts of New
Resident Investor Decrees Granted and Individuals Filing Form 8898 Declaring
Bona Fide Residency in Puerto Rico, 2012-2023

Based on our analysis of resident investor incentive
recipients who claimed the incentive in 2021, we found that only half filed a
Form 8898 telling IRS they had changed their residency to Puerto Rico.
According to IRS officials, some high-net-worth individuals who know that they
will not satisfy the test for bona fide residency may choose not to file a Form
8898 with IRS because the $1,000 penalty for failing to notify IRS is low
compared to the tax benefit they are receiving. Conversely, some high-net-worth
individuals may be exempt from the requirement to file Form 8898 because they
fall below the $75,000 income threshold. This can happen if a taxpayer chooses
not to realize large unrealized capital gains until some future tax year after
relocating to Puerto Rico.

Export service decrees. Since 2012, DDEC has
granted 3,899 export service decrees (see fig. 6). [18] To receive this decree, businesses
must operate through an office located in Puerto Rico and must perform services
for foreign individuals or entities that do not have any nexus (e.g., business
connection) to Puerto Rico. Our analysis indicates that at least 529 of the
2,201 active resident investor incentive recipients in 2021 (24 percent) also
had an export service business decree in 2022.

Figure 6: Annual Counts of New
Export Service Business Decrees Granted, 2012-2024

Incentive Recipients’ Federal Taxes Paid Decreased Sharply After Moving to
Puerto Rico

Resident investor incentive recipients were
disproportionately high-income taxpayers (see fig. 7). We found the adjusted
gross income (AGI) of resident investor incentive recipients prior to moving
was about $900,000. [19] At the highest income levels, we found that 17.4 percent of resident investor
incentive recipients reported an average AGI of $1 million or more, including
1.5 percent with an average AGI of $10 million or more. [20] This compares to 0.5 percent of all
U.S. taxpayers with a reported average AGI of $1 million or more and 0.02
percent who had an average AGI of $10 million or more.

Figure 7: Income of All U.S.
Taxpayers and Taxpayers Receiving the Puerto Rico Resident Investor Tax
Incentive

Notes: The income of taxpayers who received the resident
investor incentive is based on the inflation-adjusted average of their federal
adjusted gross incomes in the 5 years prior to relocating to Puerto Rico for
those who claimed the incentive on their Puerto Rico tax returns in 2021. The
U.S. taxpayer distribution is based on data in the Internal Revenue Service
2022 Statistics of Income Individual Complete Report. Dollar amounts are
inflation-adjusted 2022 dollars.

We also found that 11 percent of resident investor
incentive recipients reported average AGIs that were negative or $0. For
taxpayers with negative AGIs, total positive income can provide additional
insight into taxpayers’ financial situations. [21] AGI accounts for certain expenses, deductions, and other adjustments which can
be used to lower total income. For this reason, even taxpayers with low or
negative AGIs may have relatively high total positive income.

For example, taxpayers could have significant income from
capital gains, which would be included in their total positive income, but have
even larger business losses, which would offset the income in their AGIs. This
is consistent with our finding that the 5 percent of taxpayers who reported
negative average AGIs also reported average positive income. These taxpayers
reported average positive incomes of just over $960,000 and average AGIs of
negative $1.2 million.

When considering the effect of resident investor incentive
recipients moving to Puerto Rico on federal taxes, total federal taxable income
and federal tax paid provide key insights. [22] Based on our analysis, the average federal taxable income and federal taxes
paid by resident investor incentive recipients decreased significantly after
they moved to Puerto Rico. Specifically, we found:

· average annual federal taxable income decreased by $341,409 (39
percent) from $875,241 to $533,832, adjusting for inflation; and

· average annual federal tax paid decreased by $127,143 (46
percent) from $278,112 to $150,969, adjusting for inflation (see fig. 8).

In aggregate, the decrease in federal tax revenue from
this population could amount to hundreds of millions of dollars per year. [23]

Figure 8: Average Total
Federal Taxable Income and Total Federal Taxes Paid by Taxpayers Receiving the
Puerto Rico Resident Investor Tax Incentive

Note: Dollar amounts are inflation-adjusted 2023 dollars.

Our analysis found that resident investor incentive
recipients move to Puerto Rico from a range of U.S. states (see table 2). [24] Among those for whom we could
identify the state from which they moved, about 57 percent moved from
California, Florida, New York, or Texas, the four most populous U.S. states. [25]

Table 2: Prior State of
Residence of 2021 Puerto Rico Resident Investor Incentive Recipients

State | Number | Percent
California | 381 | 19.9
Florida | 290 | 15.1
New York | 254 | 13.2
Texas | 174 | 9.1
New Jersey | 86 | 4.5
Illinois | 79 | 4.1
Nevada | 75 | 3.9
Colorado | 52 | 2.7
Massachusetts | 50 | 2.6
Arizona | 48 | 2.5
Washington | 46 | 2.4
Georgia | 45 | 2.3
Pennsylvania | 42 | 2.2
Virginia | 40 | 2.1
Connecticut | 33 | 1.7
Utah | 30 | 1.6
North Carolina | 27 | 1.4
Tennessee | 27 | 1.4
Maryland | 24 | 1.3
Oregon | 24 | 1.3
Michigan | 19 | 1.0
Ohio | 15 | 0.8
Minnesota | 13 | 0.7
Washington, D.C. | 11 | 0.6
Missouri | 11 | 0.6
Wisconsin | 11 | 0.6
South Carolina | 10 | 0.5
Total | 1,917 | 100%

Source: GAO analysis of data from Internal Revenue Service
and the Puerto Rico Department of Treasury. | GAO‑26‑107225

Note: This analysis starts with the population of resident
investor incentive recipients who claimed the incentive on their 2021 tax
returns filed with the Puerto Rico Department of Treasury. The tax return data
include the year that they established residency in Puerto Rico. For these
taxpayers, we identified the most recent U.S. state that the taxpayers used for
their addresses on IRS Form 1040 prior to the year they established bona fide
residency in Puerto Rico. For the purpose of this analysis, we included
Washington, D.C. and excluded U.S. territories. Missing data, non-U.S.-state
locations, and states with fewer than 10 former residents are excluded.
Percentages add up to 100.1 due to rounding.

Tax Incentives’ Effect on Puerto Rico’s Economic Growth Is
Difficult to Determine

Overall Economic Activity in Puerto Rico Has Remained Relatively Flat over
the Past Decade

The federal government and the government of Puerto Rico
forgo revenue from taxpayers receiving the resident investor and export service
business tax incentives. The favorable tax rates offered by Puerto Rico are
intended to generate economic activity to offset the forgone revenue. There are
multiple sources of information that provide insight into economic activity in
Puerto Rico in the years following the introduction of the resident investor
and export servics business tax incentives. Two key indicators that we
considered are trends in economic growth and trends in the housing market.
Macroeconomic events, including two hurricanes, a series of earthquakes, and
the global COVID-19 pandemic, also affected these indicators over the last
decade.

Puerto Rico’s Economic Growth in Recent Years

In real terms, Puerto Rico’s economy has shown little or
no growth since the resident investor and export service business tax
incentives were first introduced in 2012, but it is not possible to measure
what growth or decline would have been without the incentives. Real gross
national product (GNP) in Puerto Rico is 4.4 percent lower in 2024 than it was
in 2014, but growth was positive in 2021, 2022, 2023, and 2024, as shown in
figure 9. [26]

Figure 9: Puerto Rico’s Real
Gross National Product and Growth Rate, 2014-2024

Other economic indicators also show a lack of economic
growth in the last decade. The Economic Development Bank of Puerto Rico devised
the Economic Activity Index to measure general economic activity in Puerto
Rico, with higher numbers representing greater economic activity. As shown in
figure 10, economic activity has fluctuated in response to various events but
has shown little growth over time. The index in November 2014 was approximately
the same as it was in November 2024, the most recent date for which the
information was available at the time of our analysis.

Figure 10: Economic Activity
Index and Critical Events in Puerto Rico, 2000-2024

The economic effects of natural disasters, the pandemic,
and subsequent federal funding make it difficult to isolate the effect of the
resident investor and export service business incentives on the Puerto Rico
economy. Throughout the last 10 years, Puerto Rico’s economy has been
significantly affected by macroeconomic factors, including the debt crisis that
began in 2015, Hurricanes Irma and Maria in 2017, a series of earthquakes in
December 2019 and January 2020, and the COVID-19 pandemic in 2020. The
hurricanes caused billions of dollars in damage to Puerto Rico’s
infrastructure, housing, and economy. For example, the hurricanes severely
damaged Puerto Rico’s electric grid, resulting in an 11-month blackout that was
the longest in U.S. history and complicated recovery efforts following the
storms.

The hurricanes, earthquakes, and COVID-19 pandemic were
followed by an influx of federal funds for disaster relief and pandemic
response, which have contributed to economic growth in Puerto Rico. For
example, as of 2023, the Federal Emergency Management Agency had awarded about
$23.4 billion in Public Assistance to Puerto Rico’s permanent recovery work
related to the hurricanes and earthquakes. Following the start of the COVID-19
pandemic, six federal laws allocated $24.8 billion to Puerto Rico.

Trends in Puerto Rico’s Housing Market

Some local officials and representatives from
nongovernmental organizations we spoke to raised concerns that the resident
investor incentive may be affecting Puerto Rico’s housing market. However, the
effect of the incentive on the price of housing is unclear. According to data
from the Federal Housing Finance Agency, while home prices have increased in
Puerto Rico, they have risen less rapidly than in the United States as a whole
over the past decade, as shown in figure 11.

Figure 11: Growth in Housing
Prices in Puerto Rico and Nationwide, January 1995-December 2024

Notes: The indexes presented here are the Federal Home
Finance Agency purchase-only house price index for Puerto Rico and the United
States. Puerto Rico housing price index data are published by the Federal
Housing Finance Agency with the first quarter of 1995 equal to
100. Housing price index data for the United States are published with the
first quarter of 1991 equal to 100. To present price growth of the United
States and Puerto Rico together, we renormalized the United States data so that
the first quarter of 1995 would be equal to 100 for both series. The house
price index for Puerto Rico is considered “developmental” and accordingly has
greater uncertainty.

Rents have also increased in Puerto Rico, but also by less
than they have in the United States as a whole. According to data from the
Census American Community Survey, median gross rent in Puerto Rico increased
from $448 in 2012 to $557 in 2023, a 24 percent increase. Over that same
period, median gross rent across the United States as a whole increased from
$884 to $1,406, a 59 percent increase.

Recipients of tax incentives are participating in the
housing market as both purchasers and renters. According to a 2024 report from
DDEC, 37 percent of resident investor incentive recipients owned a home in
Puerto Rico with an average value of over $5 million as of 2020, 30 percent
rented, and 33 percent were unknown.

Municipal leaders we spoke to expressed differing views of
the effects of tax incentives on housing in their localities. A local official
from one municipality said that resident investor incentive recipients were not
competing for the same properties as local residents because the recipients
were purchasing more expensive homes than other local residents. However,
officials from other municipalities cited concerns related to resident investor
incentive recipients purchasing numerous properties for use as short-term
rental units.

Local officials noted that residents of their
municipalities face challenges finding affordable rental housing. However, the
local officials were not sure if these challenges could be attributed to
resident investor incentive recipients. Officials from two municipalities said
it is difficult to find property owners willing to rent to recipients of
low-income housing vouchers since short-term rentals are more profitable. [27] An official from one of these
municipalities said that he thought short-term rentals were increasingly
prevalent and that money sourced from them did not stay in the local area.
Officials from another municipality said they had observed some incentive recipients
buying many buildings at the same time. These officials said they believed this
was in part responsible for unfavorable views of resident investor incentive
recipients by local residents.

Evidence Is Mixed on Overall Costs and Benefits of the Tax Incentives and
Economic Effects Are Difficult to Isolate

Given the influence of the factors described above, it is
not clear if the economic development that has occurred since the Puerto Rico
tax incentives were introduced would have occurred in the absence of the
incentives. It is also not clear if these incentives are generating economic
activity equal to the revenue the government forgoes to offer them or if
economic activity would have decreased without the incentives in place.

The economic effects of the resident investor incentive
are likely small on the scale of Puerto Rico’s economy overall. In 2023, there
were fewer than 3,000 resident investor incentive recipients. This is less than
one-tenth of 1 percent of the 3.2 million people who lived in Puerto Rico in
2023. This ratio makes any effects that this population may have on Puerto
Rico’s overall economy difficult to measure apart from larger economic trends.
Some economic studies funded by DDEC suggest an increase in economic activity
and employment related to the tax incentives, with local perspectives and
migration data suggesting more mixed results.

Evidence from Economic Studies

Hacienda projects that from 2020 through 2026, the Puerto
Rico government will forgo $4.4 billion as a result of the resident investor
incentive and $1.8 billion in revenue as a result of the export service
business incentive. [28] For 2022, Hacienda estimated the forgone revenue for the resident investor and
export service business incentives to be $637 million and $264 million
respectively. These estimates represent the difference between the taxes that
incentive recipients paid, compared to the taxes they would have paid if they
did not receive the incentives, assuming reported income stayed the same.
Hacienda’s measure of forgone revenue does not incorporate potential behavioral
responses by taxpayers, such as whether the taxpayers would have moved to
Puerto Rico had these incentives not been offered.

Economic studies done on behalf of the Puerto Rico
government have attempted to quantify the economic effects of the resident
investor and export service business tax incentives. A 2021 study contracted by
DDEC found that economic activity in Puerto Rico was between 1 and 3 percentage
points higher because of these economic incentives compared to what it would
have been without them. [29] The study found that these effects were modest and that positive employment
effects were primarily due to the export service business incentive. It also
made recommendations, including modifying the resident investor incentive to
increase the capital gains tax rate for new recipients. This recommendation has
not been implemented.

A 2024 study also published by DDEC found that the
incentives have positive revenue effects. [30] This study specifically attempted to identify the return on investment
associated with the resident investor and export service business tax
incentives, among other incentives. It estimated that in 2022, resident
investor incentive recipients paid over $200 million in taxes and donations to
Puerto Rico, while the incentives cost Puerto Rico $184 million. [31] Additionally, the study estimated
that in 2022, resident investor incentive recipients had established more than
1,000 businesses. These recipients also held nearly 800 export services decrees
that generated approximately $420 million in tax revenue compared to a cost of
$356 million. [32] Additionally, the study estimated that export service businesses employed
approximately 22,000 persons directly and led to employment for an estimated
52,000 persons indirectly. [33]

It is difficult to draw conclusions about the overall
economic effects of these incentives, given variation in results from the
economic studies due to a variety of factors including limitations in available
data and differing assumptions and methodologies used. Each of the economic
studies we reviewed focused on different inputs and outcomes and are not
necessarily comparable. For example, the 2021 DDEC study generally tried to
estimate the size of Puerto Rico’s overall economy with the incentives compared
to where it may have been without the incentives. In contrast, the 2024 study
generally measured benefits and costs in terms of Puerto Rico territorial and
local government revenue.

Evidence from Local Perspectives

Local officials, researchers, economic development firms,
and nongovernment organizations we spoke with in Puerto Rico were less certain
about the effectiveness of the tax incentives at generating sufficient economic
activity to offset their costs. Officials involved in economic development work
said that few, if any, of the people receiving tax incentives would be in
Puerto Rico without the incentives and emphasized the positive effects on
Puerto Rico’s economy. Conversely, an economist thought Puerto Rico has relied
too heavily on tax incentives to develop its economy, relative to other tools
for growth.

One municipal official expressed mixed views on the effect
of the incentives on local taxes. The official said that his area benefitted
from an increase in certain municipal taxes, such as those charged on
construction projects, as resident investor incentive recipients may purchase
and remodel expensive homes. However, the same official noted that the
structure of the export services business incentive limits the benefit to
municipalities that could come from local property taxes. Consistent with this observation,
the 2024 study published by DDEC estimates that forgone property taxes
associated with this incentive are considerably higher than the benefits. An
official in another locality agreed that the municipality had seen an increase
in the number of construction permits in the area, which had benefited the
locality.

While perspectives varied on the overall benefits of the
incentives, most local officials we spoke to cited positive effects on
employment, even those who thought the overall effects were not positive or
worth the cost. For example, officials from one municipality noted that tax
incentive recipients often established corporations as well as other
businesses, such as restaurants, which generate employment. As noted above, the
DDEC 2024 return on investment study estimated that more than 70,000 jobs were directly
or indirectly attributable to the export service businesses incentives.

New resident investor incentive recipients are required to
make an annual $10,000 charitable donation. [34] An official from one municipality expressed skepticism about the extent to
which the charitable donations of resident investor incentive recipients are
benefitting the local community. According to the DDEC study, in 2022, out of
2,660 individuals with active decrees, 765 individuals reported making at least
one donation. [35] DDEC’s 2024 study reported that in 2022, resident investor incentive recipients
made almost $11 million in required charitable donations. The study reported
that the top recipients of donations made by resident investor incentive
recipients are the Boys & Girls Club and the Act 20/22 Foundation, an
organization that allocates money to different charities and provides guidance
related to Puerto Rico’s resident investor and export services incentives.
Officials from two municipalities pointed out that the donations do not need to
be made to organizations located in the cities where the recipients live. One
of these officials said he thought the requirements should be changed to ensure
the donations are made to organizations that are local to the recipient of the
resident investor incentive.

Evidence from Migration Data

Data on migration to Puerto Rico suggest that while the
resident investor and export service business incentives may have motivated
some people to move to Puerto Rico, other factors also contribute to
relocation. The population of resident investor decree holders has grown in
recent years, particularly in 2021. Additionally, the number of people filing
Forms 8898—which taxpayers use to notify IRS that they either became or ceased
to be a bona fide resident of a U.S. territory—has increased among both resident
investor incentive recipients and nonrecipients, as seen in figure 12.

Figure 12: Form 8898 Filings
Establishing Bona Fide Residency in Puerto Rico, 2007-2021

Note: Some taxpayers who did not receive the resident
investor incentive in 2021 may have received the incentive in earlier years,
and either stopped receiving the incentive or ceased to be residents of Puerto
Rico.

This increase in individuals declaring bona fide residency
in Puerto Rico without claiming resident investor incentives suggests that
these tax incentives may not be the only factor driving migration to Puerto
Rico, although the incentives may encourage some additional people who would
not move to Puerto Rico otherwise to do so.

The U.S. Census Bureau reported that Puerto Rico’s
population declined over the past decade, though the rate of decline slowed in
2024. In 2024, Puerto Rico’s population experienced a 0.02 percent decline over
the prior year, in contrast to 1.3 percent and 0.5 percent declines in 2022 and
2023, respectively. Puerto Rico also experienced net positive migration in
2024. As shown in figure 13, Puerto Rico’s population declined 8.6 percent from
2015 through 2024.

Figure 13: Population of
Puerto Rico, 2015-2024

IRS Did Not Effectively Leverage Data on Taxpayers
Receiving Puerto Rico Tax Incentives

IRS Compliance Efforts Have Been Slow to Show Results

The IRS campaign was slow to demonstrate results, in part
due to the complexity of high-income, high-wealth audits. In addition, IRS did
not prioritize this effort and communication gaps between IRS and Hacienda left
the campaign without key data on the taxpayer population for more than 4 years,
as discussed in greater detail later in the report. We are not reporting
results of IRS’s audits due to the sensitivity of the data, but the number of
audits opened and closed in the initial years of the campaign was low until
substantially increasing in the last year.

IRS officials told us up to 12 staff were assigned to the
campaign, as of July 2025. These staff manage campaign operations, splitting
their time across various projects and program areas. Revenue agents audit the
individual returns designated as high risk and receive technical support from
campaign staff as needed. According to IRS officials, audits of these taxpayers
are resource intensive, taking an average of 2 years to complete and requiring
highly trained revenue agents. Confirming residency and income source are
particularly challenging.

· Residency. Where and when a taxpayer was residing for a
given period is determined based on facts that are often difficult to obtain
and confirm. For example, IRS may need to review detailed information such as
credit card statements and travel records.

· Income source. The source of income may stem from multiple
jurisdictions and can be difficult to verify, especially for taxpayers with
numerous income streams that are individually complex.

Because of the level of complexity, officials said these
audits are only suited for experienced revenue agents.

In the last year, IRS has taken some steps to make improvements
in its compliance efforts. Specifically, the IRS campaign has increased the
number of opened and closed audits, and campaign officials held their first
formal coordination meeting with Hacienda in April 2025.

Going forward, the campaign will face staffing-related
challenges. According to IRS officials, as of June 2025, IRS had lost 87 of the
revenue agents conducting examinations in this area to the Deferred Resignation
Program, retirement, promotion, or reassignment within the agency, an
approximately 38 percent loss. Not all of these agents were auditing
campaign-specific cases, but remaining agents had to absorb additional workload
following their departures. This reduces IRS’s capacity to open new campaign audits.
In addition, the campaign lost two of its subject matter experts. We have
previously reported that IRS has skills gaps in mission critical occupations,
including revenue agents. [36]

The campaign focuses only on civil noncompliance.
Separately from the campaign, IRS Criminal Investigation special agents
investigate individual taxpayers for criminal noncompliance, as well as
professionals who were found to have promoted criminal noncompliance to
clients. IRS Criminal Investigation refers any taxpayer data under review that
are not indicative of criminal potential, but could have potential for civil
noncompliance, to the campaign.

IRS Does Not Have Procedures to Address the Challenge of Acquiring Data
from Hacienda

For the first 4 years of the campaign, IRS did not obtain
a dataset of all taxpayers receiving Puerto Rico’s resident investor incentive
that was both current and contained Social Security numbers (SSN). Although IRS
does not oversee the administration of Puerto Rico’s resident investor
incentive, the campaign focuses on the federal tax obligations of taxpayers
receiving the resident investor incentive. Thus, these data are important for
IRS to make fully informed enforcement decisions for this population.

DDEC maintains the list of taxpayers with active decrees,
including a public list with names and the dates decrees were granted. However,
this list does not include SSNs and not all decree holders claim the incentive
on their Puerto Rico tax returns. Hacienda processes resident investor
incentive recipients’ tax returns and has the most complete data on this
taxpayer population.

IRS has requested data from Puerto Rico intermittently.
The IRS campaign made two initial requests to Hacienda in 2020, but Hacienda
did not respond to either IRS request. Hacienda officials told us that at that
time, Puerto Rico was recovering from an earthquake that struck the
commonwealth in January 2020 and significantly damaged the infrastructure. The
earthquake and the ensuing COVID-19 pandemic contributed to this lack of
response. IRS stopped following up with Hacienda in 2021, resulting in a 3-year
gap in attempts to acquire data from Puerto Rico until 2024 when IRS made its
third request, as shown in figure 14.

Figure 14: Timeline of Internal
Revenue Service Attempts to Acquire Taxpayer Data from Hacienda

After receiving DDEC’s approval, we provided IRS a list of
SSNs of taxpayers with active decrees as of 2022 that we obtained from DDEC in
February 2025. This was the first new data covering all active decree holders
that IRS had received in 4 years. IRS used this list as a source for additional
data requests to Hacienda.

Subsequently, the IRS campaign received its first dataset
from Hacienda that covered the full taxpayer population for tax year 2021.
Additionally, IRS campaign officials reported holding their first formal
meeting with Hacienda in April 2025 to discuss Puerto Rico data sharing
efforts. However, the IRS campaign has no documented plans to routinely acquire
the most current data from Hacienda going forward. IRS officials told us the
campaign is an ongoing effort and that they have no plans to end the campaign.
Thus, there will be a continuing need for current, actionable data.

IRS and Hacienda have a tax coordination agreement which
states that Puerto Rico and the federal government are to routinely exchange
tax information to assist in their respective tax administration
responsibilities. Additionally, our prior work has identified several leading
practices to enhance interagency collaboration, such as defining common
outcomes and bridging organizational cultures. [37]

IRS officials told us the campaign decided to move forward
without data from Hacienda in 2021 because the campaign received a 2019 dataset
of decree-holders that was provided to the campaign by IRS Criminal
Investigation staff, which officials thought was sufficient.

However, relying solely on 2019 data from 2021 to 2025
restricted IRS enforcement options due to the statute of limitations that
limits IRS’s ability to assess taxes on older cases. [38] Further, IRS did not have data on
new entrants to the taxpayer population during this period.

By not having current data on all recipients of the
resident investor incentive, IRS did not have full visibility into the relevant
taxpayer population, including new entrants. Establishing procedures to
regularly obtain current data on all taxpayers who receive Puerto Rico’s
resident investor incentive would improve IRS’s efforts to ensure compliance.
Additionally, these procedures could include processes that incorporate our
leading collaboration practices (see fig. 15), helping IRS and Hacienda
establish support for one another’s initiatives, reinforce mutual goals and
expectations, and better equip officials in both agencies to effectively share
current data on the full taxpayer population.

Figure 15: Leading
Collaboration Practices

IRS Has Not Established Written Procedures to Evaluate Referrals from
Puerto Rico

IRS does not have a process for evaluating referrals it
received from DDEC of taxpayers whom Puerto Rico identified as not meeting its
residency requirement. Specifically, in August 2023, DDEC shared audit reports
with IRS that identified 179 taxpayers who did not provide evidence that they
met Puerto Rico’s residency requirement. One campaign official reviewed a few
cases before determining the referrals did not need to be prioritized.

Residency is a shared requirement between the Puerto Rico
resident investor incentive and the federal income tax exemption. We analyzed
the information from the DDEC audit reports against IRS data and identified a
significant number of taxpayers with indicators of potential noncompliance with
their federal tax obligations. About half of these taxpayers reported no
taxable income to IRS in 2019, the most recent year in the audit period. Yet,
all of the taxpayers we reviewed had between 1 and 7 years of noncompliance
with Puerto Rico’s residency requirement from 2013 to 2019. While there are
some differences in the Puerto Rico and federal residency requirements,
taxpayers who do not meet Puerto Rico’s residency requirement are less likely
to meet federal residency requirements. Taxpayers who do not meet federal residency
requirements are not eligible for the federal tax exemption.

We have shared the results of our analysis with IRS for
additional consideration. According to the Internal Revenue Manual, campaigns
help IRS achieve its objective of identifying and assigning resources to
address the highest potential compliance risks, and a main objective in
selecting workload for campaigns is to select returns with the highest positive
effect on tax administration. [39] However, IRS did not take action on DDEC’s referral of taxpayers who did not
provide evidence that they met Puerto Rico’s residency requirement.
Additionally, IRS does not have written processes in place for how it will
address any future referrals from government agencies in Puerto Rico.

IRS officials said they did not pursue these DDEC
referrals because they would have rather invested their resources in leveraging
data from Hacienda, which has more relevant data than DDEC. However, when IRS
received the referrals in August 2023, Hacienda had not provided IRS any
taxpayer data, and IRS did not request data from Hacienda again until July
2024. According to IRS officials, IRS determines resource allocations among
different campaigns based on their priority ranks, and IRS officials said they
do not believe written guidance on external referral prioritization is
necessary given the campaign’s high-priority rank. However, the campaign does
not have written policies or criteria to identify external referrals that have
high potential for audit in comparison to internal leads within the campaign,
and IRS did not leverage previous referrals from the Puerto Rico government
within the campaign.

Developing written procedures to review cases of potential
noncompliance among resident investor incentive recipients referred to IRS by
Puerto Rico government agencies could help IRS strategically allocate its
resources toward high audit potential cases and help improve compliance. It
would also help ensure referrals are treated consistently.

IRS’s Campaign Has Not Pursued Efforts to Promote Voluntary Compliance

The objective of the IRS campaign is to address
noncompliance through a variety of treatment streams beyond examinations,
including educational outreach. Additionally, the Taxpayer Bill of Rights
states that taxpayers have the right to clear explanations of the laws and IRS
procedures in all correspondence. [40]

As of November 2025, IRS’s campaign had not taken
additional action to educate taxpayers whom IRS had identified as receiving
Puerto Rico’s resident investor incentive, such as sending an educational
letter to those taxpayers. According to IRS officials, they began drafting an
educational letter in November 2024 tailored to taxpayers receiving Puerto
Rico’s resident investor incentive as a result of our audit. As of November 2025,
IRS finalized the text of the letter and used data we provided during the course
of this audit to identify the letter recipients. However, there are additional
steps IRS plans to take before sending the letter, including its ongoing effort
to refine the taxpayer data necessary to process the letters.

IRS officials said that they had not sent educational
letters in the past because it can be difficult to determine whether an
individual is currently claiming the resident investor incentive. Sending a
letter to taxpayers for whom the information would not be relevant could create
confusion among the taxpayers and could lead taxpayers to call IRS for
clarification. However, in 2025, IRS obtained more current data on taxpayers
receiving Puerto Rico’s resident investor incentive which can inform its educational
outreach. IRS officials confirmed that there are generally few drawbacks to
sending such letters.

IRS has an opportunity to provide clear explanations of
complex compliance requirements and increase voluntary compliance among
taxpayers receiving Puerto Rico’s resident investor incentive by sending
educational letters to this taxpayer population. Educational letters are a
cost-effective tool, and IRS is also able to track the efficacy of these
efforts by identifying taxpayers who filed amended returns after receiving an
educational letter.

Conclusions

Since 2012, thousands of individuals have moved from the
mainland United States to Puerto Rico and received tax incentives from the
territory that are intended to bring new businesses and residents to the
commonwealth, and along with them, economic growth. Individuals who receive
Puerto Rico’s resident investor incentive could also, separately, be largely
exempt from federal income taxes depending on the source of their income. Specifically,
we found that in aggregate, the decrease in federal tax revenue from taxpayers
receiving Puerto Rico’s resident investor incentive could amount to hundreds of
millions of dollars per year.

IRS has missed opportunities to leverage data from Puerto
Rico on taxpayers receiving resident investor incentives. From the start of the
campaign until early 2025, IRS’s compliance initiative was generally not basing
its audit decisions on the most current data that included the full population
of taxpayers receiving the Puerto Rico tax incentives. Communication gaps
between IRS and Hacienda delayed IRS’s acquisition of these data for years.
Establishing procedures to regularly obtain current data on all relevant
taxpayers from Hacienda would strengthen IRS compliance efforts. Moreover, the
inclusion of leading collaboration practices into such procedures could help
IRS and Hacienda establish support for one another’s initiatives.

Further, with the information it did have, IRS did not
pursue cases with indicators of potential noncompliance that the government of
Puerto Rico identified and sent to IRS. Specifically, DDEC identified 179
taxpayers who did not provide evidence that they resided in Puerto Rico for the
required 183 days per year—one of the ways taxpayers can meet federal residency
requirements to qualify for federal income tax exemption from income sourced
from Puerto Rico. IRS only reviewed a small number of these cases before
determining the information did not need to be prioritized. However, we
reviewed these files and identified a significant number of taxpayers with
indicators of potential noncompliance, which we have shared with IRS. IRS could
improve compliance and ensure referrals are treated consistently by
establishing written procedures to review cases of potential noncompliance
among resident investor incentive recipients referred to IRS by Puerto Rico
government agencies.

In light of the complex enforcement and resource
challenges IRS faces, IRS should also consider avenues to promote voluntary
compliance. Educational efforts, such as sending taxpayers educational letters
that explain compliance requirements related to an aspect of their probable tax
situation, can be a cost-effective way to promote voluntary compliance. In
November 2025, IRS reported it is in the later stages of sending an educational
letter tailored to this taxpayer population as a result of our audit.

Recommendations for Executive Action

We are making the following three recommendations to IRS:

The Commissioner of Internal Revenue should establish
procedures to regularly obtain from Hacienda current data on all recipients of
the Puerto Rico resident investor incentive. These procedures could incorporate
GAO’s leading collaboration practices. (Recommendation 1)

The Commissioner of Internal Revenue should establish
written procedures to review cases of potential noncompliance among recipients
of the resident investor incentive that Puerto Rico government agencies
identify and send to IRS. (Recommendation 2)

The Commissioner of Internal Revenue should take action to
promote voluntary compliance, such as sending educational letters explaining
key compliance requirements to taxpayers who are benefiting from Puerto Rico’s
resident investor incentive. (Recommendation 3)

Agency Comments

We provided a draft of this report to the Internal Revenue
Service and the Office of the Governor of Puerto Rico for review and comment. IRS
and the Office of the Governor of Puerto Rico provided written comments that
are reprinted in appendixes II and III. IRS and the Office of the Governor of
Puerto Rico also provided technical comments, which we incorporated as
appropriate. IRS concurred with all three of our recommendations and stated
that it will take steps to address our recommendations by institutionalizing
procedures specific to this campaign and completing final review of an
educational letter.

As agreed with your offices, unless you publicly announce
the contents of this report earlier, we plan no further distribution until 30
days from the report date. At that time, we will send copies to the appropriate
congressional committees, the Internal Revenue Service, the Office of the
Governor of Puerto Rico, and other interested parties. In addition, the report
will be available at no charge on the GAO website at https://www.gao.gov .

If you or your staff have any questions about this report,
please contact me at mctiguej@gao.gov .
Contact points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff who made key
contributions to this report are listed in appendix IV.

James R. McTigue, Jr. Director, Strategic Issues Tax Policy and Administration

Appendix I: Objectives, Scope, and Methodology

This report (1) describes the population of individuals
and businesses receiving Puerto Rico’s resident investor and export service
business tax incentives; (2) describes selected economic effects of Puerto
Rico’s resident investor and export service business tax incentives on Puerto
Rico’s economy based on available data; and (3) assesses the Internal Revenue
Service’s (IRS) efforts to ensure compliance among U.S. persons relocating to
Puerto Rico and claiming bona fide residency.

Population of Resident
Investor and Export Service Incentive Recipients

To describe the number of resident investor and export
service decrees granted by year, we analyzed data from the Puerto Rico
Department of Economic Development and Commerce (known by its acronym in
Spanish, DDEC). These data list each decree holder and the date the decree was
granted. We analyzed data from 2012, when the incentives were first introduced,
through 2024.

Not all individuals who were granted a decree from DDEC
ever relocated to Puerto Rico or used their decree to receive tax incentives.
To ensure our analysis described resident investor incentive recipients, we
focused on the 2,201 individuals who received the incentive on their 2021 tax
returns submitted to the Puerto Rico Department of Treasury (known by its name
in Spanish, Hacienda. [41]

We also received summary data on individual investor
incentive recipients from 2022 and 2023. Collectively, tax returns filed from
2021 to 2023 included returns filed by 3,165 of the 5,852 (54 percent) of individuals
granted individual investor decrees from 2012 to 2024. [42] We were not able to determine if any
of the remaining individuals ever relocated to Puerto Rico or used their
decrees.

To analyze income characteristics before and after
individuals relocated to Puerto Rico, we matched the 2,201 individuals from
2021 Hacienda data to federal tax return information from IRS.

Because these individuals relocated to Puerto Rico in
different years, we took data for each individual from 5 years before they
relocated to Puerto Rico, as well as data from up to 5 years after they
relocated to Puerto Rico. Some taxpayers did not file 1040s in all 5 of the
prior years, and IRS data were only available through 2023. If there were fewer
than 5 years of data available before or after an individual relocated, we used
as many years as were available. We adjusted all dollar values for inflation
prior to averaging to account for the fact that they occurred at different
points in time.

To identify the states from which resident investor
incentive recipients moved, we analyzed IRS Form 1040 data, identifying the
most recent U.S. state the individual listed on their income tax return prior
to the year in which the person relocated to Puerto Rico.

Individuals meeting certain requirements are required to
file Form 8898 with IRS when they establish bona fide residency in Puerto Rico.
We matched individuals receiving resident investor tax benefits in 2021 to IRS
data on individuals who filed Form 8898. As part of this analysis, we
interviewed officials from IRS, DDEC, and Hacienda, and conducted standard data
reliability assessments. We found that the available data were sufficiently
reliable for our purposes.

Economic Effects on Puerto
Rico’s Economy

To capture macroeconomic events that have significantly
affected Puerto Rico’s economy throughout the last decade, we reviewed our prior
reports on disaster relief to Puerto Rico following Hurricanes Irma and Maria
in 2017, a series of earthquakes in 2019 and 2020, as well as the COVID-19
pandemic. [43] We also reviewed reports on Puerto Rico’s debt crisis and its efforts to
recover from it. [44]

To describe selected economic effects of Puerto Rico’s
resident investor and export service business tax incentives on Puerto Rico’s
economy, we reviewed publicly available data from a variety of governmental
sources in Puerto Rico and in the federal government. To understand recent
trends in Puerto Rico’s economy, we reviewed data from the Puerto Rico Planning
Board on the commonwealth’s gross national product and economic growth and the
Economic Activity Index, a measure developed by the Economic Development Bank
of Puerto Rico. We also used data on housing prices from the Federal Housing
Administration and rental prices from Census’s American Community Survey to
describe the housing market in Puerto Rico.

To consider how the tax incentives specifically have
affected the economy in Puerto Rico, independent of other events, we reviewed
available studies that have attempted to determine the effects of the tax
incentives on the commonwealth’s economy. We reviewed a report from Hacienda
quantifying tax expenditures offered by the government. We also reviewed
studies contracted by DDEC that attempted to isolate the effect of the
incentives from other factors and that attempted to identify the return on
investment associated with the incentives by quantifying benefits as well as
costs.

We supplemented our review of available data and research
by conducting site visits in Puerto Rico and interviewing government officials,
researchers, economic development firms, and stakeholder groups, selected based
on their knowledge of the tax incentives.

We also selected the municipalities of Aguadilla, Dorado,
Rincón, and San Juan for additional focus because local stakeholders and
government officials noted that large numbers of resident investor incentive
recipients lived in these localities. We met with local officials from these
municipalities to better understand local perceptions of the incentives and
their effects. These municipalities were selected judgmentally and are not
necessarily representative of all communities in Puerto Rico. We used conversations
with local officials from these municipalities as well as other organizations
to determine how the tax incentives are perceived at the local level.

Finally, we used IRS data on the number of Form 8898
filers and Hacienda data on individuals who used their decrees to receive tax
incentives to understand how many individuals who moved to Puerto Rico received
and used decrees. We supplemented this with information from the Census Bureau
and the Puerto Rico Planning Board about overall trends in migration to and
from Puerto Rico.

IRS Oversight

To assess IRS efforts to ensure compliance among U.S.
persons relocating to Puerto Rico and claiming bona fide residency, we reviewed
IRS documents and spoke with agency officials about IRS’s efforts to ensure
individuals receiving Puerto Rico’s resident investor incentive met federal
residency and income sourcing requirements. We met regularly with IRS officials
responsible for IRS’s compliance campaign focusing on taxpayers receiving tax
benefits in Puerto Rico to discuss their oversight efforts. We also met with
Puerto Rico government officials responsible for Puerto Rico tax
administration, decree oversight, and communication with IRS. We also reviewed
email correspondence and meeting minutes related to IRS’s work in this area,
including communications between IRS and the government of Puerto Rico related
to the exchange of tax data between the agencies. We also reviewed data on
audit outcomes, including the number of cases opened and closed by the campaign
and total dollars assessed from these cases. We compared IRS’s actions in this
area to the existing tax coordination agreement between the federal government
and Puerto Rico, our prior work on leading practices for enhancing interagency
collaboration, applicable sections of the Internal Revenue Manual, IRS campaign
objectives, and the Taxpayer Bill of Rights. [45]

We also reviewed data on instances of noncompliance
identified by the government of Puerto Rico. IRS provided us with information
on 179 individuals who did not provide evidence that they met Puerto Rico’s
residency requirement. We used the identifying information to locate each
individual’s Form 1040 and Form 8898 filings, when available. We have shared
the results of our analysis with IRS, based on our analysis of indicators of
potential noncompliance.

To determine additional actions IRS might take to ensure
compliance, we met with campaign officials to discuss requirements and
challenges associated with taxpayer education. We also reviewed minutes from
IRS coordination meetings during which this topic was discussed. We compared
IRS’s efforts to educate taxpayers to the written objective of the campaign and
relevant section of the Taxpayer Bill of Rights.

For each of our objectives, we reviewed our relevant prior
reports. In all cases, we found the data presented in this report sufficiently
reliable for its purpose.

We conducted this performance audit from December 2023 to December
2025 in accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on
our audit objectives.

Appendix II: Comments
from the Internal Revenue Service

Appendix III: Comments
from the Governor of Puerto Rico

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

James R. McTigue, Jr., McTigueJ@gao.gov

Staff Acknowledgments

In addition to the contact named above, Tara Carter
(Assistant Director), Melissa King (Analyst in Charge), Pedro Almoguera,
Virginia Chanley, Jacqueline Chapin, Zachary Conti, Daniel Mahoney, Meredith
Moles, Andrew J. Stephens, Alicia White, and Sarah Steele Wilson made key
contributions to this report.

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[1] Act to Promote the Export of
Services, 2012 P.R. Laws Act 20; Act to Promote the Relocation of Individual
Investors to Puerto Rico, 2012 P.R. Laws Act 22. Commonly referred to as Act 20
and Act 22 respectively, these provisions are generally codified, as amended,
at P.R. Laws Ann. tit. 13, §§ 1301–1357.

[2] GAO, Government Performance Management: Leading Practices to
Enhance Interagency Collaboration and Address Crosscutting Challenges , GAO‑23‑105520 (Washington, D.C.: May 24, 2023); and Internal Revenue Service, Internal Revenue Manual , § 4.50.1.2.2(5) (July 1,
2022), and The Taxpayer Bill of Rights ,
Publication 1 (September 2017).

[3] For additional information, see
GAO, U.S. Territories: Public Debt and Economic
Outlook – 2025 Update, GAO‑25‑107560 (Washington, D.C.: June 30, 2025).

[4] Financial Oversight and
Management Board for Puerto Rico, Annual Report 2024 (San Juan, PR: Jan. 22, 2025).

[5] The Tax Reform Act of 1976
established the possessions tax credit under section 936 of the Internal
Revenue Code with the purpose of assisting U.S. possessions in obtaining
employment-producing investments by U.S. corporations. The credit effectively
exempted two kinds of income from U.S. taxation: (1) income from the active
conduct of a trade or business in a possession, or from the sale or exchange of
substantially all of the assets used by the corporation in the active conduct
of such trade or business; and (2) certain income earned from financial
investments in U.S. possessions or certain foreign countries, if they were
generated from an active business in a possession, and were reinvested in the
same possession. See GAO, Puerto Rico: Factors
Contributing to the Debt Crisis and Potential Federal Actions to Address Them, GAO‑18‑387 (Washington, D.C.: May 9, 2018).

[6] 2019 P.R. Laws Act 60.

[7] The law limits eligibility to
individuals who were not residents of Puerto Rico during a prior specified
period.

[8] Qualifying net capital gains
must be realized before January 1, 2036, in order to receive the resident
investor preferential tax rates.

[9] According to Hacienda, Puerto
Rico residency is based on the domicile of the individual, which is established
through physical presence, together with the intention to remain in a place
indefinitely. An individual is presumed to be a domiciled resident of Puerto
Rico if the individual has been present in Puerto Rico for 183 days during the
year, although this presumption can be rebutted by the actions and personal
circumstances of the taxpayer. Under Puerto Rico law, an individual can have
only one domicile. P.R. Laws Ann. tit. 31§ 5551.

[10] These payments must be made
every year to nonprofit entities that operate in Puerto Rico, are certified
under the Puerto Rico Internal Revenue Code, and are not controlled by the
resident investor or their immediate family members. Evidence of these payments
must be included as part of the annual report incentive recipients file with
the government of Puerto Rico. Half of the donation must be to certain
organizations that work to eradicate child poverty. 13 P.R. Laws § 45830(b).

[11] The export service business
incentive does not have a residency requirement for the owner(s) of the
business.

[12] 26 U.S.C. § 933.

[13] 26 U.S.C. § 937(a). For
federal tax law purposes, the determination as to whether a person is present
for any day is made under the principles of 26 U.S.C. § 7701(b) and 26 C.F.R. §
1.937-1(c)(3).

[14] An individual’s tax home is
their regular or main place of business, employment, or post of duty regardless
of where they maintain their family home. If the taxpayer does not have a
regular or main place of business because of the nature of their work, then
their tax home is where they regularly live. If a taxpayer does not fit either
of these categories, they are considered an itinerant and their tax home is
wherever they work.

[15] Taxpayers are considered to
have a closer connection to a territory than to the United States or to a
foreign country if they have maintained more significant contacts with the
territory than with the United States or foreign country. In determining if taxpayers
have a closer connection to a territory, IRS considers a variety of facts and
circumstances including the location of the taxpayer’s permanent home, family,
and personal belongings.

[16] These numbers include
incentives granted under Act 22 and, after 2019, the Incentives Code, commonly
known as Act 60.

[17] For the purposes of this
report, we refer to anyone Puerto Rico granted a resident investor incentive
decree as a decree holder and those who claimed the incentive on a Puerto Rico
tax return as resident investor incentive recipients.

[18] These numbers include
incentives granted under Act 20 and, after 2019, the Incentives Code, commonly
known as Act 60.

[19] The population we analyzed
included taxpayers who claimed the resident investor incentive on their 2021
tax returns with Hacienda. We analyzed data these taxpayers reported on their
IRS Forms 1040 for the 5 years before moving to Puerto Rico. Dollar amounts are
inflation-adjusted 2023 dollars.

[20] Dollar amounts are
inflation-adjusted 2022 dollars to align with the most recent IRS statistics
about taxpayers by AGI.

[21] Total positive income is the
sum of all positive amounts shown for the various sources of income reported on
the individual tax return, and losses are treated as $0.

[22] Total taxable income is
calculated by subtracting the standard or itemized deduction and the qualified
business income deduction from AGI.

[23] We analyzed IRS data for the 5
years before and up to 5 years after moving to Puerto Rico among U.S. taxpayers
who received the Puerto Rico resident investor tax incentive on their 2021 tax
returns filed with Hacienda. Among the 2,172 taxpayers in this population,
adjusting for inflation, the mean total taxes paid decreased by $127,143 per
taxpayer, per year, in 2023 dollars.

[24] We do not have data on the
change in state tax revenue, but most resident investor incentive recipients
moved from states with income taxes.

[25] Based on data from Hacienda
and IRS Form 1040 data.

[26] While gross domestic product
(GDP) measures the value of goods and services produced inside a country, or in
the case of Puerto Rico, a territory, GNP measures the value of goods and
services produced by the territory’s residents. GNP includes production from
residents abroad and excludes production by foreign companies in a country. In
Puerto Rico, GDP has consistently been greater than GNP. This means that
production by foreign companies in Puerto Rico is larger than production by
residents of Puerto Rico in the territory and abroad. Because of our report’s
focus on a tax incentive for residents, we present GNP, as it would better
reflect their economic output. While GDP has consistently been greater than GNP
in Puerto Rico, the two measurements have risen or fallen together for each
year from 2014 through 2024.

[27] The U.S. Department of Housing
and Urban Development’s Housing Choice Voucher program helps low-income
families, elderly persons, veterans, and disabled individuals afford housing in
the private market. Program participants can choose any eligible housing unit,
with rent partially covered by a subsidy paid directly to the landlord. The
Housing Choice Voucher Program also includes a project-based program that
connects assistance to specific housing units.

[28] Puerto Rico Department of
Treasury, Tax Expenditure Report for Tax Year 2024 (Aug. 4, 2023).

[29] Ekonometrica Corp., The
Employment and Output Impact of the 2012 Acts 20, 22, and 273, 2021.

[30] Puerto Rico Department of
Economic Development and Commerce, Performance Evaluation of Economic
Incentives: Data Assessment and Return on Investment (ROI) Analysis , 2024.

[31] The comparison assumed a 4
percent tax rate on interest, dividends, and capital gains, which was the rate
the authors estimated would still attract new resident investors to Puerto
Rico.

[32] The estimate of tax revenue
generated included estimates of sales tax and income tax paid by individuals
whose employment is assumed to be either directly or indirectly attributed the
export services businesses. The cost estimates were based on a corporate income
tax rate of 8 percent versus the 4 percent rate they pay with a decree. The
study authors estimated that an 8 percent corporate income tax rate would still
attract export service businesses to Puerto Rico. Costs also included a 60
percent exemption from municipal excise taxes and a 90 percent exemption from
property taxes.

[33] The estimate of indirect
employment was calculated based on a 2012 input/output matrix developed by the
Puerto Rico planning board.

[34] The requirement of a $5,000
donation was introduced in 2017. In 2019, the requirement increased to $10,000.

[35] Not all individuals with
resident investor decrees may have made use of them. According to the same DDEC
study, in 2020, less than 80 percent of resident investor incentive recipients
claimed the tax incentive on their Puerto Rico tax returns.

[36] See GAO, Internal Revenue Service: Strategic Human Capital
Management is Needed to Address Serious Risks to IRS’s Mission, GAO‑19‑176 (Washington,
D.C.: Mar. 26, 2019).

[37] For more information on our
leading collaboration practices, see GAO, Government
Performance Management: Leading Practices to Enhance Interagency Collaboration
and Address Crosscutting Challenges , GAO‑23‑105520 (Washington, D.C.: May 24, 2023).

[38] In general, the statute of
limitations prohibits the assessment of federal income tax after 3 years. 26
U.S.C. § 6501.

[39] IRM §§ 4.50.1.1(2), 4.50.1.2.2(5).

[40] Internal Revenue Service, Your Rights as a Taxpayer , Publication 1 (Revised
September 2017).

[41] In June 2025, Hacienda
informed us it addressed an issue with its search parameters that allowed it to
identify approximately 30 additional taxpayers who received Puerto Rico tax
benefits from their decrees in 2021. These individuals were not included in our
analysis, which was conducted using the original 2021 dataset provided to IRS
by Hacienda.

[42] Puerto Rico updated its data
in June 2025 to identify 10 additional returns across 2022 and 2023, which are
included in the 2022 and 2023 yearly counts. However, we did not receive enough
data on those 10 returns to include them in the analysis of total number of
unique primary taxpayers from 2021 to 2023.

[43] GAO, U.S. Territories: Public Debt and Economic Outlook – 2025
Update , GAO‑25‑107560 (Washington, D.C.: June 30, 2025); Puerto Rico
Disasters: Progress Made, but the Recovery Continues to Face Challenges , GAO‑24‑105557 (Washington, D.C.: Feb. 13, 2024); COVID-19: U.S.
Territory Experiences Could Inform Future Federal Relief , GAO‑23‑106050 (Washington, D.C.: Sept. 19, 2023); Telecommunications:
FCC Assisted in Hurricane Maria Network Restoration, but a Clarified Disaster
Response Role and Enhanced Communication Are Needed , GAO‑21‑297 (Washington,
D.C.: Apr. 29, 2021); and Puerto Rico Electricity
Grid Recovery: Better Information and Enhanced Coordination Is Needed to
Address Challenges , GAO‑20‑141 (Washington, D.C.: Oct. 8, 2019) .

[44] GAO, U.S. Territories: Public Debt and Economic Outlook – 2025
Update , GAO‑25‑107560 (Washington, D.C.: June 30, 2025), and Puerto Rico:
Factors Contributing to the Debt Crisis and Potential Federal Actions to
Address Them , GAO‑18‑387 (Washington, D.C.: May 9, 2018).

[45] GAO, Government Performance Management: Leading Practices to
Enhance Interagency Collaboration and Address Crosscutting Challenges , GAO‑23‑105520 (Washington, D.C.: May 24, 2023).

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