Act 60 Audits: What DDEC and the IRS Actually Check
Act 60 enforcement stopped being hypothetical years ago. In 2025 alone, DDEC's Office of Incentives audited roughly 1,800 decrees — issuing 305 deficiency notices, 19 annulments, and 4 revocations — while the IRS continues an active examination campaign aimed at Act 60/Act 22 residency and sourcing claims. Two different auditors, two different questions, one common outcome-determiner: the state of your records.
Two audits, two questions
| DDEC audit | IRS audit | |
|---|---|---|
| Who | Puerto Rico's Dept. of Economic Development | U.S. federal tax authority |
| Question | Did you meet your decree conditions? | Were you really a bona fide resident, and was the income really PR-source? |
| Typical requests | Donation receipts and split proof, annual reports, home-purchase evidence, residency logs, CPA letters | Travel records and day counts, housing, banking, closer-connection facts, income sourcing and pre-/post-move gain analysis |
| Worst outcome | Deficiency → annulment/revocation of the decree | Loss of the §933 exclusion → back taxes, interest, penalties |
They compound: a DDEC revocation is a flare for federal examiners, and a failed federal residency position makes decree compliance moot.
What triggers scrutiny
Recurring patterns behind examinations: missed or late annual filings (now surfaced automatically by the fine regime), donation deficiencies (wrong split, wrong org, late), thin presence — day counts hovering at the line with heavy mainland travel, mainland footprints — kept homes, licenses, businesses, family stateside, and large post-move gains shortly after relocation, which invite the pre-/post-move sourcing question (how that split works).
What "prepared" looks like
An audit is a document request with a deadline. The difference between a bad month and an afternoon:
- Day counts: a contemporaneous, timestamped travel log covering the years in question — not a calendar reconstructed from memory (the 183-day rule).
- Evidence by category: home, family, banking, social/civic, personal property, voting — organized the way examiners analyze closer connection, with no empty quarters.
- Decree paper: every annual report, fee receipt, donation receipt with the split visible, and the property deed.
- One package: indexed, dated, exportable. Examiners draw conclusions from presentation as well as substance.
How the process typically runs
- Notice arrives with a document request and response window.
- Response — complete, organized, on time. Extensions exist; silence escalates.
- Findings — closure, a deficiency notice with cure steps (DDEC), or proposed adjustments (IRS).
- Resolution or escalation — cured deficiencies close; unresolved ones head toward annulment/revocation or federal assessment. Professional representation is the norm once findings issue.
The uncomfortable math
305 deficiency notices from ~1,800 audits is a ~17% hit rate — and most deficiencies trace to mundane failures (the common mistakes), not exotic tax positions. The audit is rarely what kills a decree; the previous three years of unkept records are.
Frequently Asked Questions
- How far back can audits reach?
- Multiple years; assume the full decree term is examinable and keep records accordingly.
- Does a clean DDEC audit protect me from the IRS?
- No — different sovereigns, different questions. Passing one has no preclusive effect on the other.
- Should I respond to an audit letter myself?
- Document production is mechanical if records exist; findings and disputes are where licensed professionals matter. This page describes the process; it isn't representation advice.