Thinking of leaving New York for a tax-friendly state? Prepare to be audited.

NewYorkCity

If you think you can prove New York isn’t your permanent home, the taxman says think again. Tax audits of individuals claiming non-residency in New York are on the rise, and this isn’t entirely a new trend. States like New York have always been aggressive about residency audits. According to Institutional Investor, New York City’s high concentration of multi-millionaires and billionaires working in, commuting into, and/or living part-time in the city, combined with its high taxes, has made it one of the most aggressive states when it comes to auditing nonresident filers.

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Often those living and working across state lines are high net worth individuals whose income can be a big revenue driver for the state. A report from New York City Comptroller’s Office found that some of the country’s highest income earners—think Wall Streeters, titans of industry, celebrities, athletes—claim to be non-residents in New York. Attorney Fred Feingold says going after nonresident tax filers has become a “big profit center for New York“. The state has handled domicile cases where the amount involved was over $100 million for one year. That is serious money for New York.

Going after nonresident tax filers has become a “big profit center for New York”.

Understanding New York’s aggressive enforcement posture

New York state tax records show that on average non-New Yorkers who can’t prove they spent less than 183 days in the state end up paying upwards of $67,000 in extra taxes to New York. Many factors play into the aggressive pursuit of New York non-resident filers. First, the state’s improved data and technology capabilities make it more effective in pursuing audits, says Brian Gordon, former district audit manager in Manhattan and Brooklyn, who worked for the state for more than 30 years. Better data means the state can better assess which audits could be probable revenue generators. Plus, being able to subpoena phone records, credit card statements or EZ Pass statements provides ample proof of one’s whereabouts in the event of an audit.

Second, in the absence of new rules or legislation, a quick way to increase state revenue is to increase enforcement of existing laws. And who better to go after than those who don’t vote in your jurisdiction? They may not be happy about being targeted but the state doesn’t have to worry about retaliation on Election Day since ‘non-residents’ by definition don’t vote in New York.

And who better to go after than those who don’t vote in your jurisdiction?

On the topic of politics, one theory suggests that rising political populist movements in liberal states like New York could be driving the more aggressive targeting of high income, high net worth individuals, many of whom have accumulated their wealth on Wall Street or in tech.

Recent tax changes make NY residency even more expensive

But conspiracy theories aside, the numbers show that New York residency audits aren’t letting up any time soon. It is more important than ever before to consider these tax residency audit trends given the tax changes rolled out by Washington in late 2017. According to Institutional Investor, “changes in the tax code last year, which limit the amount of state income and property taxes individuals can deduct from their federal income taxes, have made moving to lower-taxed locales a topic of consideration for many of the metropolitan area’s wealthy.”

In New York, the inability to deduct state income and property taxes could mean a substantial difference in total taxes paid for some high income individuals. “Now that people realize they’re not going to get a deduction for state income taxes on their federal income taxes, all of a sudden New York has become a bigger issue for them,” says Feingold.

Because these tax changes may result in more high net worth and high income earners fleeing to states with better tax climates, auditors have all the more reason to aggressively pursue New Yorkers who change their filing status and begin to claim non-residency for tax purposes. In some cases, a domicile change can in itself trigger a non-residency audit.

“New York state often will not hesitate to challenge a tax return reporting a high-net-worth individual’s change of domicile where certain factors are present—for example, where the individual continues to maintain a residence in New York or continues to spend a significant amount of time in New York,” says Craig Fields, co-chair of Morrison & Foerster’s tax department.

Credible data: your best audit defense

Residency audits are not only a pain but the costs can really add up. On top of forking over their ‘unpaid’ or ‘underpaid’ taxes, those who can’t prove they were in New York less than 183 days often get hit with an additional 20% in penalties and interest on average, plus up to hundreds of thousands in legal fees, and hundreds of hours wasted in getting through the tax audit.

According to residency legal experts at Hodgson Russ LLP, the document accumulation and analysis of a residency audit can take months, and those who get hit with a higher tax bill often also end up paying 20% more than they would have. That’s because of the inability to get any refunds on the taxes they already paid—technically, overpaid—to their home state.

If you are going to need to prove that you are not a resident in New York, Monaeo can help you be audit-ready. Our mobile app helps keep track of your days automatically, sends you early-warning alerts as you approach your 183 day limit, delivers reliable days allocations for your tax preparers to file correctly, and ultimately arms you with detailed back-up reports in support of your non-resident tax filing status.

Beyond the significant monetary savings, Monaeo ultimately delivers you peace of mind.

Monaeo is the only service of its kind proven to work in residency audits time and again, saving clients upwards of an estimated $100 million to date. If and when you’re faced with a residency audit, you can feel confident you have the data to prove where you’ve been (and not been) every day of the year.  Try it risk-free for 30 days to see how it can help you.

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