The US Department of Justice (DOJ) and IRS are currently conducting a criminal investigation into potential abuses of Puerto Rico’s Act 60 tax incentive program, and the government has reportedly subpoenaed at least one law firm to force it to turn over the privileged and confidential client files of Act 60 investors whom the law firm advised (Michael J. Bologna, “Baker McKenzie Pulled into Probe of Puerto Rico Tax Shelter,” Bloomberg Tax, Sept. 18, 2025, https://news.bloombergtax.com/daily-tax-report-state/baker-mckenzie-pulled-into-us-probe-of-puerto-rico-tax-abuses). This reporting further indicates that these subpoenas seek records concerning residency analysis, income sourcing positions, and legal opinions provided to Act 60 clients.
Act 60 investors in Puerto Rico generally understand that the DOJ and the IRS have for some time now been focused on what they view as abusive uses of Act 60’s tax incentives (Jay Nanavati and Mariana Gusdorf, “Puerto Rico’s Act 60 Tax Incentive Program Attracting Heightened IRS Scrutiny of Sourcing and Transfer Pricing,” Journal of Tax Practice & Procedure, Spring 2023). But investors may not understand some of the more powerful investigative tools that are available to the DOJ and the IRS. For Act 60 investors, one tool deserves special attention: the use of grand jury subpoenas to acquire privileged and confidential documents and testimony from investors’ own lawyers. Understanding how subpoena power and the crime-fraud exception to the attorney-client privilege operate is critical to assessing risk.
DOJ Authority to Subpoena Law Firms
A federal grand jury has sweeping authority to investigate potential criminal conduct, including the power to subpoena documents and testimony. Lawyers are not categorically exempt from this power. DOJ policy expressly contemplates grand jury subpoenas directed to attorneys and law firms, subject to internal approval requirements designed to protect legitimate privilege interests [DOJ, Justice Manual § 9-11.255 (Subpoenas to Attorneys for Information Relating to the Representation of Clients) (prior approval requirement and standards), https://www.justice.gov/jm/jm-9-11000-grand-jury (current through Mar. 19, 2026); Justice Manual § 9-13.410 (Guidelines for Issuing Grand Jury or Trial Subpoena to Attorneys for Information Relating to the Representation of Clients), https://www.justice.gov/jm/jm-9-13000-obtaining-evidence (current through Mar. 19, 2026)].
According to the DOJ, “because of the potential effects upon an attorney-client relationship that may result from the issuance of a subpoena to an attorney for information relating to the attorney’s representation of a client, the Department exercises close control over such subpoenas.” [Justice Manual § 9-13.410(1) (Authorization of the Criminal Division)] The DOJ exercises that control by requiring that federal prosecutors obtain authorization from the presidentially-appointed Assistant Attorney General for the Criminal Division (or a Deputy Assistant Attorney General). An important caveat is that this policy does not create enforceable rights. As a result, privilege disputes arising from law firm subpoenas are typically resolved by courts applying the law of attorney-client privilege, not by determining whether prosecutors followed internal DOJ authorization requirements.
The DOJ requires that prosecutors “strike a balance between an individual’s right to the effective assistance of counsel and the public’s interest in the fair administration of justice and effective law enforcement” [Justice Manual § 9-13.410(2) (Preliminary Steps)]. To strike this balance, prosecutors must make “all reasonable attempts … to obtain the information from alternative sources before issuing the subpoena to the attorney, unless such efforts would compromise the investigation or case” [§ 9-13.410(2)].
Once a prosecutor has cleared these hurdles, they must write a lengthy memorandum setting forth the grounds for believing that a crime has taken place, the need for the information sought in proving the crime, the prosecutor’s efforts to obtain the information from other sources, and the proposed subpoena’s narrow reach in terms of subject matter and time [Justice Manual § 9-13.410(3) (Evaluation of the Request) (setting forth evaluation factors including necessity, privilege, and efforts to obtain information from alternative sources)].
More important than any of these requirements is the requirement that the prosecutor show why the information sought is not protected by a valid claim of the attorney-client privilege [§ 9-13.410(3)(A)]. The operative word is “valid”: here one must consider the crime-fraud exception to the attorney-client privilege.
The Crime-Fraud Exception to the Attorney-Client Privilege
A claim of attorney-client privilege is not valid if the attorney-client communications were made in furtherance of ongoing or contemplated criminal or fraudulent conduct. Of course, clients hire attorneys every day to assist them in dealing with allegations of past criminal or fraudulent conduct. If a client tells his or her attorney that he or she committed a crime, that communication is indisputably protected by the attorney-client privilege.
The analysis changes completely if a client asks an attorney for help in committing a crime. Under the crime-fraud exception to the attorney-client privilege, any communications in furtherance of the client’s criminal scheme are not protected by the privilege. Critically, the exception applies even if the attorney is unaware of the client’s illicit purpose. The inquiry is not whether the attorney acted improperly, but whether the client used the attorney’s services or communications to further a crime or fraud. Accordingly, the crime-fraud exception can apply even where the attorney did nothing wrong and provided advice in good faith.
A law firm’s client files are normally protected from disclosure by the attorney-client privilege, preventing the DOJ from gaining access to them. But if the DOJ can persuade a judge that the client used the law firm in furtherance of a crime, whether with or without the law firm’s knowledge, the client’s files are fair game. This is exactly the course that the DOJ is likely to pursue.
Litigating the Crime-Fraud Exception
The attorney-client privilege belongs to the client—not the attorney—so only a client can assert the privilege. Furthermore, if a client asserts the privilege over their law firm file, they cannot simply claim that the entire file is privileged. Instead, the client has to assert the privilege on a document-by-document basis, a tedious and expensive task. This is because the law does not allow for “blanket” assertions of the privilege over entire batches of documents.
As a result, a client has to list and describe every document over which they are asserting the privilege and turn the list, known as a “privilege log,” over to the DOJ. The DOJ then decides whether it agrees with the client’s privilege assertions and whether it wants to try to overcome the privilege.
If the DOJ decides to try to pierce the privilege, it must ask a federal court to compel the client to turn over the files, citing the crime-fraud exception. In the case of the Act 60 investigation, the DOJ will likely argue to the court that the client used their lawyer to facilitate tax evasion, setting up federal court litigation between the DOJ and the client over what the client’s true intentions were in seeking legal advice. Critically, the crime-fraud exception would not allow the DOJ to bypass the privilege of Act 60 clients who went to an attorney in good faith for the purpose of lawfully arranging their affairs to enjoy the benefits of Act 60. The crime or fraud at issue must be the client’s, as the client is owner of the privilege.
Why the DOJ is Willing to Fight
The potential tax savings that are available to Act 60 investors are substantial, but they only apply to Puerto Rican income taxes, not federal income taxes. Why, then, is the DOJ so interested in these tax benefits? Because Act 60 works in tandem with the federal tax laws to reduce an investor’s Puerto Rican and federal income taxes.
Under IRC §§ 933 and 937, bona fide residents of Puerto Rico may exclude their Puerto Rico-source income from US federal income taxation (Treasury Regulations §§ 1.933-1, 1.937-1). In other words, residents of Puerto Rico who earn their income from a Puerto Rico source do not pay federal income taxes. Instead, they pay Puerto Rican income taxes, which are far higher than typical state income taxes. In fact, Puerto Rican income tax rates are not much different from federal income tax rates, with a top marginal tax rate of 33%.
This is where Act 60 comes in. If a mainland US resident becomes a bona fide resident of Puerto Rico, he or she pays no federal income tax on his or her Puerto Rico-sourced income and, instead of paying Puerto Rico’s 33% marginal tax rate, pays between 0% and 4% in Puerto Rican tax on his or her Puerto Rico source income under Act 60.
According to Senate Finance Committee Ranking Member Ron Wyden (D-Ore.), some Act 60 investors have incorrectly claimed Puerto Rico residency or have attempted to recharacterize pre-move appreciation in assets (i.e., unrealized increases in the value of assets that accrued before the investor became a bona fide Puerto Rico resident) as post-move appreciation (Press Release, “Wyden Calls for Full IRS Investigation of Tax Shelter Involving Puerto Rico Residency, Unveils New Findings in Ongoing Investigation,” Apr. 30, 2026, https://tinyurl.com/55wd8u4r).
The first visible outcome of the DOJ and IRS’s investigation into alleged Act 60 abuses materialized in 2025, when the US Attorney’s Office for the Southern District of Florida announced that Act 60 investor Suresh Gajwani had pled guilty to filing a false document with the IRS to shield approximately $30 million in capital gains under Act 60 (Press Release, US Attorney’s Office, Southern District of Florida, “Investor Pleads Guilty to Filing False Form with IRS to Shield $30 Million in Capital Gains Under Puerto Rico Tax Incentive Program,” June 13, 2025,https://tinyurl.com/5bc3x2xz ). According to the government, Gajwani falsely backdated corporate elections and misrepresented the timing of his Puerto Rico residency to avoid federal tax on gains that accrued while he was a Florida resident. The government also alleged that Gajwani pursued the strategy with the assistance of professional advisers—including an attorney—who recommended converting his company to an S corporation so he could recharacterize his pre-move gains as Puerto Rico-sourced gains.
Preparing for Next Step
When the stakes for the government are high enough, as the purported abuse of Act 60’s tax benefits appears to be, the DOJ is willing to pursue evidence against taxpayers even if it means piercing their attorney-client privilege. It remains to be seen whether the DOJ will litigate the crime-fraud exception in its Act 60 investigation, but this may be the next logical step in the DOJ’s investigation.
