United States

Tax Court holds Puerto Rico resident liable for self-employment tax

Puerto Rico residents may owe self-employment tax


On July 25, 2016, the Tax Court upheld the IRS’s determination that a bona fide resident of Puerto Rico was still subject to Federal self-employment taxes, despite otherwise being exempt from federal income tax.

During the year at issue, 2010, the petitioner, Jose Curet, was a bona-fide resident of Puerto Rico. He filed an income tax return with the Commonwealth of Puerto Rico reporting income from a sole proprietorship, but did not file a U.S. Self-Employment Tax Return with the IRS. The IRS subsequently prepared a substitute self-employment tax return for Mr. Curet, assessing the self-employment tax due on the income he did not report, as well as penalties for failure to file returns and pay tax.

Bona-fide residents of Puerto Rico, even if they are U.S. citizens, are not subject to federal income tax on items of income sourced to Puerto Rico (unless earned as an employee of the U.S. government). Mr. Curet argued that, because he was a bona-fide resident of Puerto Rico, he was not subject to any U.S. tax at all. The Tax Court ruled that this exemption does not extend to self-employment tax.

Mr. Curet did not establish that he had reasonable cause for his failure to file a U.S. self-employment tax return, or pay the related tax. As a result, the Tax Court upheld the IRS asserted penalties for failure to file a return and pay tax.

Much has been written in the tax press and other media about the tax benefits of moving to Puerto Rico. This case serves as a reminder that becoming a resident of Puerto Rico does not put one entirely outside the reach of the U.S. net. Taxpayers who are considering a relocation to Puerto Rico should make sure to consider all the potential tax liabilities as well as potential federal and state tax savings.


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