FINANCIAL ADVISOR | JUNE 17, 2019
In recent years, high-tax states began to suspect a tax-dodging trend as more taxpayers changed residences while still maintaining ties to their former home states. As a result, these states have been more aggressive with their residency audits.
“We see high-income earners and retirees increasingly fleeing high-tax states like New York, California and Illinois for states like Florida, Arizona, Nevada and Texas,” said Anupam Singhal, co-founder of New York-based Monaeo, which offers an app to help defend against residency audits. “Many are saying that if you are wealthy and move out of state, the chance of being targeted for a state-residency audit is 100 percent.”
He believes New York conducts thousands of residency audits each year and, in the process, recouped about $1 billion in taxes between 2010 and 2017.
What are some red flags that could trigger an audit? “Business ties to the former state, amount of time spent in the former state, moving shortly before selling a business or a large amount of stock [and] maintaining a large personal residence in the former state,” said Robert Seltzer, a CPA at Seltzer Business Management in Los Angeles. “Unlike our criminal code where you are innocent until proven guilty, the onus [of proof] is on the taxpayer.”
Each state also has specific rules that can trigger audits, according to Stephanie Sandle, a CPA/CFP and managing director at MAI Capital Management in Cleveland. “Two red flags are a significant increase in taxable income in the year of residency change or shortly after, or a spouse with a different state of residency,” she said.
A healthy economy can also lead business owners to sell interests and incur large capital gains, again motivating moves. A New Yorker netting $80 million from a business sale then buying a home in Florida may say that they now intend to move full-time Florida, according to Geoff Christian, managing director at CBIZ MHM in Greenville, S.C. “But if they never sell their home in New York and continue to maintain significant ties and relationships there ... did they really intend on moving to Florida?”
Christian also warned against filing a resident state return in the first year after a move and then filing a non-resident state return the next year—and of claiming “everywhere income” in that second year in the new state. “This is perhaps the most likely way for a state to originate an audit,” he said.
The California Franchise Tax Board has a large, specially trained unit focused on residency audits, said Lawrence Pon, a CPA/CFP at Pon & Associates in Redwood City, Calif. “The taxpayer receives an innocuous one-page letter stating [the board has] questions about your residency status and possible state tax due,” he added. “Don’t be fooled: They’ve already done hours of research into your situation.”
Clients can help their cause if they take actions that show a commitment to their new state, such as registering to vote, getting involved in local politics or charities and establishing new banking and investment relationships, according to Christian.
Auditors want to see inherent lifestyle changes from recently moved residents. “Factors include where they take their pet to the veterinarian, where their country club membership is, where they spend their anniversary and even the quantity and type of food in their refrigerators," Singhal said.
“Make sure your will is based on the new state you live in [and] affiliate with your place of worship there,” added Gail Rosen of Gail Rosen CPA PC in Martinsville, N.J. “Transfer your safe deposit and bank accounts to the new state.”
Wealthy clients can establish residency by being in a new state for more than the number of threshold days—183 for most states. Sandle recommends an audited taxpayer be prepared with:
- A calendar detailing what state they are in each day (as well as travel receipts).
- A valid driver’s license and voter’s registration in the new state.
- Documentation proving ties to the new state, such as a change of mailing address and change of address with employer.
“Auditors will come with subpoenas for cell phone records and other high-tech resources,” Singhal said. “Clients should consider technology and data-driven analytics such as GPS, geolocation and cell-tower data.”
See original article in Financial Advisor Magazine at fa-mag.com/news/wealthy-clients-who-move-may-face-strict-residency-audits