The IRS has spent five years building residency cases against Americans who claimed to have moved to Puerto Rico for its tax incentives, and the campaign has produced grand jury subpoenas, a guilty plea, and a government audit finding that half the recipients never filed the form that announces the move. The details are Puerto Rican; the method isn’t. The New Mexico Taxation and Revenue Department runs the same play against people who kept a house in Santa Fe, a job in Hobbs, or a spouse in Las Cruces while telling the state they now live in Texas. Anyone contemplating that move should study how the federal cases are built, because the state case looks the same.
What has the IRS actually done about Act 60?
Puerto Rico’s Act 60, which consolidated Acts 20 and 22 in 2019, offers bona fide residents a zero percent Puerto Rico tax on gains accrued after the move and a four percent rate on export services income, and because 26 U.S.C. § 933 excludes Puerto Rico-source income of bona fide residents from federal tax, the combined result can approach zero. The IRS opened a compliance campaign on the investor decrees in January 2021 and by July 2023 had identified roughly 100 high-income individuals for potential criminal referral. In June 2025 a Florida investor pleaded guilty to backdating an S corporation election to shield about $30 million in pre-residency gains, with restitution near $15.3 million. In September 2025 a major law firm received a grand jury subpoena for its Act 20 and 22 client files. And in December 2025 the Government Accountability Office reported that of 5,852 investor decrees issued from 2012 through 2024, only about half of the 2021 recipients had filed Form 8898, the statement that notifies the IRS of a move to a territory, and that recipients’ federal tax paid dropped by an average of $127,143. The $1,000 penalty under § 6688 for a missing form is the least of it: an audit turns on proving where the taxpayer was, day by day, and people who skipped the form tend to have skipped the documentation.
How does the federal residency test work?
Under 26 U.S.C. § 937(a) and Treas. Reg. § 1.937-1, a bona fide resident of Puerto Rico must satisfy three tests every year. The presence test is met by 183 days in the territory or by alternatives such as 549 days over three years with at least 60 each year. The tax home test requires the taxpayer’s principal place of business to be there. The closer connection test borrows the factors from § 301.7701(b)-2(d): permanent home, family, personal belongings, voting, driver’s license, banking, and organizational ties. Two features make these audits brutal. A day counts if the taxpayer is present “at any time during the day,” and the IRS rebuilds the calendar from airline records, cell tower data, card charges, and toll transponders. And under § 6501(c)(3), a taxpayer who filed no federal return because he believed all income was excluded has no statute of limitations at all.
How does New Mexico decide who is a resident?
New Mexico taxes residents on all income and nonresidents only on New Mexico-source income, so the definition carries the weight. Under NMSA 1978 § 7-2-2(S), a resident is anyone domiciled in New Mexico during any part of the year, or anyone physically present in the state for 185 days or more, with an exception, for the period after the change only, for a person who moved his abode to another state intending to remain there permanently. The regulation at 3.3.1.9 NMAC defines domicile as the true, fixed home to which a person intends to return after an absence, and lists thirteen factors the Department weighs: homes and how they’re used, time spent in each place, employment, family and children’s schools, prior domicile, other real property, banking, community and religious affiliations, the federal return address, voter registration, licenses, vehicle registration, and where sentimental property is kept. No single factor controls, and a license or voter registration “may be given less weight” than the pattern of living. One detail favors the taxpayer: 3.3.1.7 NMAC defines a day as “any consecutive 24-hour period,” so for the 185-day count, New Mexico, unlike the IRS, doesn’t count partial days.
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What do New Mexico’s own residency cases show?
The Administrative Hearings Office decides these protests, and its decisions read like federal ones. In In re Casanova, D&O No. 22-24 (N.M. Admin. Hearings Off. Nov. 30, 2022), the taxpayer worked full-time in Texas and claimed only ten days in New Mexico, but he kept a New Mexico driver’s license, voter registration, vehicle registration, and a home. The hearing officer counted eight factors pointing to New Mexico against two for Texas, held the taxpayer remained domiciled here, and upheld a $7,239.41 assessment on income earned entirely in Texas. In In re Pauly, D&O No. 21-08 (Apr. 13, 2021), a taxpayer working in Virginia whose spouse stayed in New Mexico kept his New Mexico domicile. It’s the IRS’s Act 60 method: the taxpayer’s story of where he lives is tested against where his family, home, and paperwork say he lives, and the paperwork usually wins.
What does a defensible move from New Mexico to Texas look like?
Consider a Hobbs engineer who takes a Midland job in March. If his spouse and children stay in the Hobbs house and he drives back every weekend, New Mexico treats him as a domiciliary all year and taxes his Midland wages, with no offsetting credit because Texas has no income tax. If instead the family sells or leases the Hobbs house, moves to Midland in March, enrolls the children in Texas schools, gets Texas licenses within the 90 days Texas allows, registers vehicles and votes in Texas, moves the bank accounts and church membership, and files a New Mexico part-year return for January and February, the abode-change exception in § 7-2-2(S) applies and New Mexico’s claim ends in February. Texas offers its own proof: a homestead exemption application under Tex. Tax Code § 11.13 is a sworn statement of principal residence, and since Texas constitutionally bars a personal income tax, there’s no competing return to reconcile. The file that wins a New Mexico audit is the file that wins a federal one: a departure date, a contemporaneous calendar, and every listed factor pointing the same way. The cost of getting it wrong runs for years, because under NMSA § 7-1-18 the Department has three years to assess after a return, six years if income was understated by 25 percent or more, and seven years if no New Mexico return was filed at all, which is exactly the posture of someone who assumed he’d become a Texan.
What traps run in the other direction?
The 185-day rule catches Texans, too. A Dallas couple that spends June through mid-December at a Taos second home is a statutory New Mexico resident for that year regardless of domicile, and New Mexico will tax their worldwide income for the period, with a credit only for taxes paid to other states, of which Texas collects none. Remote workers who moved to Santa Fe while keeping a Texas employer face the mirror image: New Mexico domicile and New Mexico tax on wages a Texas company pays. And a spouse who stays behind anchors the other spouse’s domicile in both the federal and state analyses. Across Puerto Rico, Texas, and New Mexico the thread is the same: a move is a fact, not a filing, and the agencies know the difference.
| Factor | IRS (Puerto Rico bona fide residency) | New Mexico (domicile / statutory residency) |
|---|---|---|
| Day-count threshold | 183 days, or alternatives under § 1.937-1(c) | 185 days makes anyone a resident regardless of domicile |
| How a day is counted | Present at any time during the day | Any consecutive 24-hour period (3.3.1.7 NMAC) |
| Family location | Closer connection factor | Domicile factor; spouse left behind is often decisive |
| Licenses, voting, registration | Closer connection factors | Listed factors, but may be given less weight than living pattern |
| Required filing | Form 8898 in year of move ($1,000 penalty) | Part-year PIT-1 for the year of the move |
| Limitations if no return filed | Unlimited (§ 6501(c)(3)) | Seven years (§ 7-1-18(C)) |
Frequently Asked Questions
Who is a New Mexico resident for income tax purposes?
Anyone domiciled in New Mexico during any part of the year, and anyone physically present in the state for 185 days or more regardless of domicile. A person who truly moves to another state stops being a resident from the date of the move.
Does getting a Texas driver’s license end my New Mexico residency?
Not by itself. The regulation lists licenses and voter registration as factors but says they may be given less weight than where you live, work, keep your family, and spend your time.
How does New Mexico count days toward the 185-day test?
A day is any consecutive 24-hour period under 3.3.1.7 NMAC, so partial days generally don’t count. The federal Puerto Rico test is stricter and counts presence at any time during a day.
If I work in Texas but my family stays in New Mexico, do I owe New Mexico tax on my Texas wages?
Usually yes. The Administrative Hearings Office has held that a spouse and home in New Mexico keep the worker domiciled here, and there’s no credit because Texas has no income tax.
How long can New Mexico go back to assess tax on someone who claimed to have moved?
Three years after a return is filed, six years if income was understated by 25 percent or more, and seven years if no New Mexico return was filed for the year.
What does the Act 60 enforcement have to do with New Mexico?
The IRS builds Puerto Rico residency cases from calendars, travel records, family location, and paperwork, and New Mexico builds domicile cases the same way. The documentation that survives one survives the other.
How North Star Law Firm Can Help
North Star Law Firm represents New Mexico taxpayers in residency and domicile audits before the Taxation and Revenue Department and the Administrative Hearings Office, in IRS examinations involving territorial and foreign residency claims, and in planning a move so the record supports it. Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and the U.S. Tax Court and brings a forensic accountant’s approach to reconstructing the calendars and records these cases turn on. The firm’s tax defense practice handles state and federal audits, its IRS audit defense practice covers the federal side, and its international and expatriation tax practice addresses residency changes that cross national borders. Contact North Star Law Firm before the move, or as soon as the audit letter arrives.