Chapter Four
What the IRS Is Actually Watching
The IRS has a term for what it takes to qualify for Act 60's tax benefits: bona fide residency. And bona fide is not a bureaucratic formality — it's a standard with real teeth, real tests, and real consequences if you fail it.
Understanding what the IRS is looking for is essential — not so you can game the system, but so you can document your genuine Puerto Rico life properly and never have reason to worry about an audit.
The Three Tests
The IRS uses three tests under Internal Revenue Code Section 937 to determine whether someone is a bona fide resident of Puerto Rico. You must satisfy all three.
Test 1: The Presence Test
You must be physically present in Puerto Rico for at least 183 days during the tax year. But read that carefully — it's 183 days, not "most of the time" or "whenever I can." It's a hard number, and every day counts.
A day counts as a Puerto Rico day if you are physically present on the island at any point during that calendar day. A day counts as a U.S. day if you are in the U.S. at any point, except in specific circumstances (travel connections under 24 hours, for example).
There is also an alternative test: 549 days over a three-year consecutive period, with a minimum of 60 days each year. However, the standard 183-day annual test is the one most practitioners use as the baseline, and staying for 200+ days per year is the general recommendation from most experienced Act 60 attorneys.
Test 2: The Tax Home Test
Your primary place of business — what the IRS calls your "tax home" — must be in Puerto Rico. This means your main professional activities, your office, your business operations, your primary income-generating activities should all be centered in Puerto Rico.
If you're a passive investor whose income is primarily investment returns rather than earned income, this test is generally easier to satisfy — your tax home is where you live. If you're an active business operator, you need to make sure your Puerto Rico business operations are genuine and substantive.
Test 3: The Closer Connection Test
You cannot have a "closer connection" to the United States (or any other country) than you have to Puerto Rico. The IRS evaluates this based on a wide range of factors:
Where is your permanent home?
Where do your family members (particularly spouse and children) live?
Where are your business relationships and professional ties?
Where are your personal belongings, vehicles, bank accounts?
Where do you vote? Where is your driver's license issued?
Where do you participate in social, cultural, and community activities?
Where is your church, gym, doctor, dentist?
The IRS looks at the totality of your life. A person who owns a home in Dorado Beach but maintains their Manhattan apartment, keeps their kids in Manhattan schools, attends their Manhattan club, and flies back to New York every chance they get is not going to pass the closer connection test regardless of how many days they spent in Puerto Rico.
This test is also why genuine community engagement matters. The people who build real lives in Dorado — who know their neighbors, who are involved in local events, whose kids go to school here, who have their actual social life here — are never going to have a problem passing this test.
What the IRS Watches Most Closely
Based on recent IRS enforcement activity, these are the areas that trigger scrutiny:
| High-Risk Behavior | Better Approach |
| Keeping your mainland home as a "primary" residence | Buy Puerto Rico property promptly (required within 2 years) and make it your clear primary home |
| Spending more time on the mainland than in PR | Track every day. Stay well above 183. Aim for 200+. |
| Timing large capital gains right after "moving" | Gains must be genuinely Puerto Rico-sourced and post-residency. Consult your attorney on timing. |
| Not updating banking, licenses, and legal addresses | Puerto Rico driver's license, bank accounts, voter registration — do all of it |
| Family remaining on the mainland long-term | If your family isn't with you, the IRS will question whether you're actually there |
| Crypto and pre-residency gains | This is heavily scrutinized. Get specific advice before you move anything. |
| Missing the charitable donation | It's required. Calendar it. Set up automatic transfers if needed. |
| Missing the annual report | The due date follows your Puerto Rico income-tax filing schedule. November 15 may apply when a return is on extension. Confirm the date for your filing status with your CPA and DDEC. |
Document Everything
This is the single most important practical piece of advice in this entire book: document your Puerto Rico life obsessively.
Keep a daily presence log — a simple calendar noting where you are each day
Save all receipts and records with Puerto Rico timestamps — restaurants, grocery stores, gas stations, anything with a date and location
Keep utility bills, lease agreements, and property documents organized
Maintain Puerto Rico bank account records showing regular local activity
Keep records of community involvement — events, clubs, school activities, charitable giving
Document your charitable donations carefully — amount, date, organization, confirmation
If you are ever audited — and the chances increase as Act 60 gains profile — your documentation is your defense. The people who face serious consequences from IRS scrutiny are almost always the ones who either weren't actually living here or the ones who were but couldn't prove it. Don't be either of those people.
This chapter discusses IRS compliance concepts for educational purposes. Tax enforcement is complex and highly fact-specific. Consult a qualified Act 60 attorney and CPA for advice specific to your situation.