International tax authorities flex their muscles in Puerto Rico

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“Doing more with less” has been the IRS mantra since the Tea Party wing of the Republican Party ushered in an era of tight budgets for tax enforcement about a decade ago. At times the mantra seemed ambitious. With 31% fewer full-time employees working in executive roles compared to 2010, the IRS conducted 48% fewer audits of personal income tax returns – a jarring trend that has had ripple effects. training in criminal tax enforcement, as historically many criminal investigations have started from leads uncovered during civil audits.

However, in certain areas, the IRS-Criminal Investigations component has innovated and adapted, which has enabled it to investigate more effectively. One of the main sets of innovations is the improved coordination of the IRS-CI with foreign tax enforcement agencies, which was recently embodied by the Joint Chiefs of Global Tax Enforcement consortium, or D5.

The work of the J5 appears to have been a major contributor to the recent demise of Puerto Rico-based Euro Pacific Bank.

“History of Non-Compliance”

Puerto Rico’s chief banking regulator, the Office of the Commissioner of Financial Institutions, issued an order on June 30 ordering Euro Pacific Bank to cease operations and stated its intention to revoke the bank’s license. OCIF’s cease and desist order was largely based on the insolvency of Euro Pacific.

But the regulator also made a long and adamant reference to the bank’s ‘non-compliance history’, saying it ‘would not authorize or condone any financial entity with a license issued by the Porto government. Rico to operate outside the law”. Undoubtedly, the J5’s coordinated investigation into Euro Pacific for tax evasion and money laundering – codenamed Operation Atlantis – which dated back at least to 2019 was on mind.

The J5 is a loosely institutionalized network of five law enforcement agencies with jurisdiction over tax crimes: IRS-CI and its counterparts in Australia, Canada, the Netherlands and the UK. Formed in 2018, its aim is to strengthen collaboration between investigators, unsurprisingly focused on transnational tax crime and the offshore banks and other international institutions that facilitate such crime. Operationally, the J5’s stated goals include sharing information and coordinating investigations and deterrence messages, all ultimately to disrupt the global operations of criminal actors and enterprises.

In the founding myth of the J5, the founding event is the disclosure in 2016 of the Panama Papers. This document revealed a shadowy network of cross-border tax evaders, money launderers and facilitators. In about a year, the J5 assembled a kind of white-collar Avengers to fight them. In truth, many OECD tax enforcement agencies have a much longer history of reasonably constructive, if not perfect, cooperation. Yet the J5 is different in key respects, based on its multilateral nature, its relative longevity as an institution, and the breadth and depth of member agency coordination and information sharing.

“Concerned about the interaction”

Much of the impetus for the Euro Pacific Bank investigation appears to have come from the US contingent, which was keen to avoid the troubling optics of a US jurisdiction sliding into full-fledged tax haven status. Under a 2020 appropriations bill, the IRS was instructed “to submit a report…which provides the number of individuals and businesses that have moved…to Puerto Rico and have obtained tax exemptions under Puerto Rican Laws 20 and 22.”

Puerto Rico Law 22 exempts eligible residents from Puerto Rican income tax on all passive income earned or accrued after an individual becomes a resident. Persons eligible for Bill 22 treatment will generally also be eligible for an exemption from US income tax on income from sources located in Puerto Rico under Section 933 of the IRC.

Thus, as the House report accompanying the appropriations bill noted, the Ways and Means Committee was “concerned about the interplay” between Puerto Rico’s Laws 20 and 22 of 2012 and Section 933. of the IRC “which enables tax evasion and denies revenue to federal, state, and territorial governments, including Puerto Rico. The IRS submitted its report to the committee, which found that hundreds of millions of dollars in U.S. tax revenue was lost due to Act 22 beneficiaries. The media reported that Euro Pacific founder Peter Schiff was one such Act 22 beneficiary.

action day

In January 2020, the J5 exposed Operation Atlantis and proclaimed a day of action including coordinated investigative activities regarding “an international financial institution located in Central America” ​​- including search warrants, interviews, production orders, subpoenas and other measures implemented by each of the J5 Components.

In the aftermath, J5 chiefs said their agencies were working on hundreds of civil and criminal cases in the five jurisdictions linked to the financial institution, not including banking regulatory proceedings, which progressed independently. Media reported in October 2020 that the unnamed financial institution was Euro Pacific Bank, although the bank is in Puerto Rico, not Central America.

Following the day of action, in September 2021, the IRS Large Business & International division announced a campaign targeting taxpayers who applied for benefits under Bill 22 without meeting the requirements of Section 937 of the IRC, which sets residency and supply rules for US income tax. LB&I said purported relocators “may misreport U.S.-source income as Puerto Rican-source income to avoid U.S. taxation.”

The timing of the IRS announcement suggested that Euro Pacific bank account holders were in its sights. In any event, as a result of the J5’s actions, the IRS likely obtained a wealth of information to begin or expedite investigations into alleged abuses of Bill 22.

Congress, take note of this example of the IRS doing more with less: leveraging foreign tax enforcement, international cooperation, and coordinated financial intelligence gathering, not just to do ongoing business and to support the closure of an allegedly abusive offshore bank, but also to plant the seeds for future law enforcement activity. We expect a slew of criminal prosecutions and audits involving alleged abusers of Bill 22.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Joseph Rilotta is a member of the litigation firm of Miller & Chevalier in Washington DC. He assists his clients with government investigations at all stages, with a particular focus on tax litigation. He was previously the attorney for the IRS Commissioner and an attorney for the tax division of the Department of Justice.

Andy Howlet is a member of the tax practice of Miller & Chevalier in Washington DC. He focuses on tax planning and helps clients understand and plan for the federal tax consequences of a wide range of transactions.

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