US Taxes in Puerto Rico: Act 60, Residency Audits & Staying Compliant (2026 Guide)

Puerto Rico is the only place under the US flag where an American can legally stop paying federal tax on certain income — and that is exactly why the IRS watches it so closely. If you moved to San Juan, Dorado, or Rincón under an Act 60 decree, or you are a founder anywhere in the world eyeing a US-connected structure, the rules that decide whether your position holds up are technical, and the penalty for guessing wrong is an audit that can claw back years of tax at once.

As an Enrolled Agent, I represent taxpayers in front of the IRS, and Act 60 cases are now one of the most examined areas I see. This guide walks through what actually determines a valid Puerto Rico tax position, and — because Puerto Rico is also a launchpad for people building US-facing businesses — how non-US founders use US entities from here too. It is general information, not individual tax advice.

Two very different taxpayers in Puerto Rico — which one are you?

The island's expat scene, centered on coworking hubs like Piloto 151 in Old San Juan and Facebook groups such as "Act 60 Puerto Rico" and "Expats in Puerto Rico," really contains two separate tax situations that people constantly confuse.

The first is the US person who relocated to Puerto Rico to claim the Act 60 individual-investor benefits — a US citizen who is betting a large tax position on being a genuine bona fide resident. The second is the foreign national — a founder from Latin America, Europe, or Asia — who is drawn to Puerto Rico's business ecosystem and needs a US entity and US banking to reach American customers. The compliance path is completely different for each, so I'll take them in turn.

If you hold an Act 60 decree: the bona-fide-residency tests that decide everything

Act 60 (which consolidated the old Acts 20 and 22) can reduce Puerto Rico-source investment income and export-services income to very low rates. But none of it matters unless you are a bona fide resident of Puerto Rico under Internal Revenue Code Section 937, and that is a three-part test the IRS applies literally.

You must meet the presence test (generally 183 days on the island, though there are alternative day-count formulas), the tax-home test (your main place of business cannot be on the mainland), and the closer-connection test (your family, home, bank, church, and social life should point to Puerto Rico, not to Miami or New York). Failing any one of the three can unravel the whole decree.

The trap most decree holders miss is the source-of-income rules. Income is only Puerto Rico-source — and only shielded — if it is genuinely earned there. Gains on stock you owned before you moved carry a ten-year look-back, and services you personally perform for mainland clients can be sourced back to the US. This is precisely where examinations live.

The IRS Act 60 audit campaign: what examiners actually ask for

The IRS has an active compliance campaign focused on individuals who claimed Act 60 benefits but may not have met the residency or source rules. If you are selected, the examination is document-driven, not conversational.

Expect to be asked for day-count evidence (flight records, credit-card geolocation, phone records), proof your tax home moved, and a full breakdown of how each dollar of shielded income was sourced. Where a US business or US clients are involved, examiners look hard at whether income was re-characterized as Puerto Rico-source to fit the decree.

As an Enrolled Agent I can represent you before the IRS in one of these exams. The single most useful thing you can do before that day ever comes is keep contemporaneous records — a residency position reconstructed after the notice arrives is far weaker than one documented in real time.

If you are a foreign founder: US market access from Puerto Rico

Now the second audience. If you are not a US person — you hold no US passport or green card — Puerto Rico's real draw is that it sits inside the US financial and legal system while giving you a foothold in a bilingual, business-friendly jurisdiction.

You do not need a Social Security Number to own a US company. A non-US founder can form a US LLC (most commonly in Wyoming or Delaware for non-residents, sometimes a Puerto Rico LLC where local operations matter), obtain a federal Employer Identification Number (EIN) from the IRS, and use that entity to open US business banking and payment processing such as Stripe or PayPal.

That structure is what lets a founder in Bogotá, São Paulo, or Bangkok bill US clients in dollars, hold a US bank balance, and look like a domestic vendor to American customers — without ever setting foot in an IRS field office.

US LLC + EIN without an SSN: how it actually works

The sequence matters, and getting it out of order is what causes months of delay. First the entity is formed at the state level. Then the EIN is applied for using Form SS-4 — a non-US applicant with no SSN or ITIN can still be issued an EIN; the application is handled by fax or phone rather than the online tool, which requires a US taxpayer ID.

Only after the EIN exists can you realistically open US business banking and connect a payment processor. An EIN is a business number and does not, by itself, make you a US taxpayer or require you to have a personal ITIN.

Whether your US LLC actually owes US income tax is a separate question that turns on whether it has US-source income that is "effectively connected" to a US trade or business. Many foreign-owned single-member LLCs owe no US income tax but still must file — which brings us to the compliance nobody can skip.

The compliance a foreign-owned US entity cannot skip

A US LLC owned by a non-resident is cheap to run but unforgiving on paperwork. A foreign-owned single-member LLC is generally treated as a disregarded entity that must file Form 5472 with a pro-forma Form 1120 every year — and the penalty for missing it starts at $25,000, automatically, whether or not the company made a dollar.

On top of that sits the federal Beneficial Ownership Information (BOI) report and any state annual report or franchise tax. None of these are optional, and none of them scale down because you are small or new.

This is the part of "just open a US LLC" that the cheap formation mills leave out. As an Enrolled Agent, the value I add is not filing a form — it is making sure the whole structure stays compliant so a $25,000 penalty never lands on a company that was trying to do everything right.

Regular expats too: not everyone in Puerto Rico is an Act 60 case

Plenty of Americans live in Puerto Rico without any decree — remote workers, retirees, military families. If that is you and your income comes from the mainland, you may owe federal tax the same as anyone, and Puerto Rico-source income goes on a Puerto Rico return.

And if you are a US citizen who has spent time in Puerto Rico and elsewhere abroad, the familiar expat rules can still apply to foreign (non-PR) income: the Foreign Earned Income Exclusion, the Foreign Bank Account Report (FBAR) for non-US accounts over $10,000, and the streamlined filing procedures if you fell behind while overseas. Puerto Rico does not switch those off.

Frequently asked questions

Do I pay US federal income tax if I live in Puerto Rico?

Bona fide residents of Puerto Rico generally exclude Puerto Rico-source income from US federal tax, but mainland-source income is still federally taxable, and you file a Puerto Rico return for local income. Whether income counts as Puerto Rico-source is the technical question that decides your bill.

What triggers an Act 60 IRS audit?

Common triggers include a large drop in reported federal income after relocating, income that looks re-sourced to fit the decree, thin day-count records, and keeping a mainland home or business. The IRS runs a dedicated compliance campaign on Act 60 claims.

Can a non-US citizen form a US LLC from Puerto Rico?

Yes. You do not need a US SSN to own a US LLC or to obtain an EIN. Non-residents most often form in Wyoming or Delaware, get an EIN by fax or phone, and then open US banking and Stripe.

Does owning a US LLC make me a US taxpayer?

Not automatically. An EIN is a business identifier. Whether the entity owes US income tax depends on whether it has US-effectively-connected income, but a foreign-owned LLC almost always still has an annual Form 5472 filing obligation regardless of profit.

I have unfiled US returns from before I moved — what now?

If you fell behind while living abroad, the IRS streamlined filing procedures are often the safe way back for non-willful cases. An Enrolled Agent can assess whether you qualify before you file anything.

Related reading: who can actually represent you before the IRS, the streamlined path back, and the automatic penalties on foreign founders. You can also download our free tax organizers to get organized before we talk.

Talk to an Enrolled Agent

This article is general information, not individual tax advice. If you want to talk through your specific situation, book your free review, or call or text (323) 900-0305.