As residents flee high tax states like California, New York, Illinois, and New Jersey, state tax authorities are making it hard to leave. New York alone is conducting on average 3,000 non-resident audits per year, according to data uncovered by Monaeo, and has won more than $1 billion since 2010 from “non-residents” who were unable to sufficiently prove they actually left.
State authorities notice when high-profile people, such as high-earners and high net-worth individuals, change their domicile and residency and stop paying taxes to their state. When they notice, they challenge their claim that they did indeed move out-of-state and they launch an audit. This pattern has led many tax professionals to say that if you’re a high-earner or high net-worth individual and you change your domicile or residency status from New York to another state, for example, you will get audited. That’s right, it’s as good as certain.
For people who are moving this year or plan to move, it’s imperative to do some preparation beforehand so you are armed to fight back if and when you are audited. What many people don’t realize is that the burden of proof to show days spent out of state falls entirely on the taxpayer.
There are a number of things you should be doing. First and foremost, keep track of days spent in both your new and the old state. Keep tabs on days travelling outside of either state. To win an audit, your ability to demonstrate that you actually spent fewer than 183 days in your old state is critical.
As co-founder of a company with technology that helps taxpayers document their location 365 days a year, I’ve heard many stories about how aggressive audits have become. I wasn’t always this informed, however. Once I was caught flatfooted in a non-residency audit and put under the gun to prove my whereabouts from a year in the past. Trust me, it’s a lot easier to document things in the present than it is to try to go back and do it later. My inability to credibly prove my whereabouts cost me dearly in both time and money. This revelation inspired me to create Monaeo.
Although there are many resources that detail how to beat a residency audit, I’d like to share some insights from my experience of what NOT to do. These tips are generally geared for those who own or rent multiple domiciles. However, in today’s brutal audit climate, even those who sell their property immediately may be put under the microscope and forced to prove when they actually left the old state.
Here’s a handy checklist. DON’T:
- Spend more days in the old domicile than in the new. This is a sure way for you to lose an audit.
- Keep your paper trail in a shoe box. There are many ways people use to document their whereabouts including toll receipts, credit card statements, boarding passes, and personal diaries. These may have been sufficient a decade ago but today tax departments have more resources at their disposal and often, for example, subpoena cellular data to build their cases, especially against high net-worth individuals. If you are not using the right technology to protect yourself with credible data, you are at a huge disadvantage. An example of this type of technology is Monaeo Personal Edition, which is the leading location tracking app.
- Put off selling a property even if you don’t plan to use it or rent it. Bear in mind that even if you move and sell your home you still can get domicile-audited but you will have an easier time proving you no longer reside in the state if you no longer rent or own property there. If you want to keep your existing property, and many people do, then it’s imperative that you stay well below the 183-day threshold in your old state.
- Buy a smaller house in Seattle but keep the big one in Chicago. There’s nothing illegal about moving to a smaller abode but if you keep the old one and it is more of a homestead, it will be a red flag.
- Sell stock or distribute shares in the same month you move to Nevada. Auditors will spot this a mile away. It’s a trigger for an audit and has snared many entrepreneurs and investors that cashed out and moved from, say, California, to a lower tax state, such as Nevada.
- Move to Wyoming without a moving van. Many tax authorities are looking to see that you are seriously committed to a new primary residence. If you move and don’t take anything with you, it sends a message that the move is either temporary or a means to reduce state income tax. You can bet that authorities will check insurance to see where your most cherished and valuable items are located. If you leave all of your art, jewelry and new Mercedes Benz in San Francisco and “move” to the badlands, it will be noticed. One suggestion here is to submit an itemization of what was moved, which documents your actual move day and can help support your case.
- Wait a year to register to vote, change driver’s license and move bank accounts. It used to be these simple changes were all one needed to establish residency. Today, auditors take the position that anyone can fill out a form, so making these changes by themselves will not be enough to demonstrate a residency change. But not changing them or waiting a long time to change them is doing yourself a disservice.
- Travel throughout the year without tracking your days. Even when you can document that you only spent 140 days in your old state and 180 days in your new one, if you can’t document all of those travel days on vacation or visiting family, your auditor may conclude that those days count toward the old state. Also, authorities have been known to subpoena cell records to see where you were on days you can’t document. This could be fine, and could even help prove your case, but we’ve seen instances where cell tower pings can inaccurately place you in another state, especially in instances where you are on the border of two states. For high-risk individuals who might run close to the 183-day threshold, having a location tracking app is without question the best investment you can make in winning an audit.
- Continue to visit your old doctors and dentist. Many people do this because they have longstanding relationships or they can’t find the same quality of care in their new state. It may seem innocuous but understand that this will be considered a sign that you haven’t really cut ties with your old domicile. It’s not a requirement to change residency but it will be a red flag.
- Move to Texas but let your kids and spouse stay in Massachusetts. We’ve seen this happen many times and it complicates the narrative as to whether you really changed domicile.
- Generate business income in New York after “retiring” to Florida. If you keep a property in New York and continue to generate income in the state, it will without doubt generate scrutiny. You will want to talk to a tax professional about ways to defend it.
- Schedule a layover at LAX and leave the terminal area to grab lunch. If you changed your residency from Los Angeles to Las Vegas and keep domiciles in both states, be aware that if you do a layover in LA it won’t be counted as a day in California – unless you leave the terminal area. Then it does. For some, that lunch could cost thousands or even millions if they were already riding up against a threshold.
People are using many methods and tools to document their whereabouts after a move, including apps like Monaeo, which tracks location using GPS, cellular and WiFi. One thing is for certain: having data is crucial and has helped many people win audits when the state says, “prove every day you were not in the state.” The burden of proof is on you.
There are many resources available to help people planning a residency change and plenty of tips on how to beat an audit. You might check out “What to Expect in a Residency Audit” from tax attorneys Hodgson Russ LLC and Monaeo also has some good insights on its blog to help you navigate.