Wealthy Americans and Corporations may be unaware of another benefit of Tax Reform’s sharp cut in the tax rate: IRS Audits are down sharply due to less funding. Don’t breathe easy just yet. States are seeking to fill revenue gaps and recover tax revenue losses due to Tax Reform, so while one type of tax audit is declining, the risk of state residency and non-residency audits continues to grow. Here are some risky behaviors to avoid:
Fleeing a high tax state. If you are a high net worth individual, and move from a high tax state like New York to a low or no income state like Florida expect hungry, $$$ deprived, aggressive auditors to come calling. Domicile, residency and non-residency audits are being conducted with greater scrutiny by states losing significant tax revenue.
Having demonstrable ties to the original state. In these types of audits the taxpayer is “guilty until proven innocent!” The idea is to show that you have indeed left and moved on. Keep receipts and data that proves your day to day whereabouts and that you are spending the majority of your time in your new home state. Credit card swipes are just the tip of the iceberg – there is technology and ways to digitize much of this information now.
Moving too much between multiple homes. Retirees, snowbirds, consultants, professional athletes, or other taxpayers who frequently alternate between permanent places of abode in two or more states have a higher risk of being audited. Change of domicile already makes you a target if you are a high net worth individual. Chart the number of days you spend at each abode as soon as possible. For example, the New York threshold is 183 days, pass the limit and New York will consider you New York a resident and tax your income.
Staying involved in your business after the sale and the move. Understand that whatever high tax state you are leaving will try very hard to not lose out on the taxes from the sale of your business. It will most certainly come after you if the stakes are high enough, especially if you are perceived as still being hands on, engaging regularly with management, traveling frequently back to the home state, etc. You will have to prove your move was legitimate. Filing for a change of address will draw attention and trigger state auditors to investigate whether business operations have actually changed. If the business is a partnership or large organization with many executives, be aware that their behavior could put you at risk.
Selling stock and then becoming a snowbird to beat a capital gain. If you are a high net individual who recently sold a large amount of stock or other asset that results in a taxable capital gain, and then claim to live in another state, you will be begging for an audit. States will come after you looking to collect tax on the capital gain of that asset. Show you are not trying to cheat the system by creating location logs leading up to the event in advance.
No knowledge of the rules and regulations. You may want to read our prior article here: Moving to Escape State Tax? Could You Pass the “Teddy Bear” Test?
CONTACT US: Residency audits happen year round – do not let your guard down. There are a Billion $$$$ reasons why a state tax department will audit you. Their success rate is high so plan ahead and be prepared before making any moves. With offices in New York and Florida, we are uniquely qualified to discuss decisions regarding relocation related to tax issues and the details of “domicile” auditors look for. Let us help you with tax “nexus,” and the hoops you need to jump through. Domicile is harder to establish than you might think! Call toll free 855-534-2727.
