If you are a high-income earner, who has recently moved into or out of New York, it’s highly likely that an audit is in your future. According to Hodgson Russ Attorneys, a leading legal firm, individuals who fit the profile face an almost certain likelihood of being audited. Between 2017 and 2022, a staggering 15,000 such audits were conducted, resulting in a cumulative revenue of over $1 billion. With New York tax audits being known as the most intrusive, and document-intensive of all personal income tax audits, it is crucial to be aware of the rules and take steps to reduce your risk. Luckily, there is technology available to help you be as prepared as possible for an audit and reduce the likelihood of an unnecessary tax bill.
Understanding residency rules
Tax authorities use two main tests to determine residency status. First, they will try to establish whether you are ‘domiciled’ in New York. This test aims to ascertain the place the individual intends to have as a permanent home. Relevant factors here include where you primarily reside, where your near and dear ones live, the location of your most valuable possessions, the amount of time you spend in the state as well as your business ties there. The second test is known as the ‘statutory residency’ test. Even if you are deemed not to be ‘domiciled’ in New York, you can still be considered a resident if you have ‘unfettered access to livable dwellings’ and spend more than 183 days there in a given year. If you meet the criteria for either of these tests, you are deemed to be a resident of New York and are liable to pay taxes there.
Keeping track of your days
Auditors can go to great lengths to investigate how many days you have spent in the state including reviewing appointment calendars, bank statements, phone records and EZ pass information. In New York, the burden of proof rests on you as the taxpayer, meaning that you are presumed to reside there unless you can prove otherwise. Your evidence must be ‘clear and convincing’ so keeping meticulous records of your location and movements is essential to avoid unnecessary tax liabilities.
Counting days manually
The 183-day test is considered to be the ‘most difficult and frustrating’ aspect of a residency audit. First of all, the rule is not as straightforward as you might assume. Even partial days spent in the state are counted towards the 183-day total, meaning that if, for example, you leave the state for a trip on Saturday morning and return on Sunday evening, you are still considered present in New York for those two days even though, in reality, your time present in the state only amounted to a few hours. There are also some exceptions to this rule, with time spent traveling through New York and time spent as an inpatient in a medical facility not being considered part of the 183-day total.
Things get complicated very quickly and if you track your days, locations and movements manually with pen and paper, it’s easy to see this could be time-consuming and prone to error. Your diary must be maintained ‘contemporaneously’ and even with meticulously kept records, an auditor will still look for corroborating third-party documentation, this will automatically be considered a New York day.
Benefits of technology
Thankfully, technology can simplify the process of tracking residency days. The Monaeo mobile app was developed to help individuals monitor the duration of their stay in a particular city or state. The app works in the background to privately and securely log your location and early-warning alerts can be set for days spent in specific cities, states and countries so you can be made aware of approaching limits automatically. The app can also generate audit-tested reports, including the entire location log for multiple years, on-demand so that you can easily share this information with advisors, the IRS, or auditors.
Taking the first steps
Navigating the complex landscape of New York tax audits can be a daunting task, however, with the right knowledge and resources, you can mitigate the risks and ensure a smoother audit process. By knowing the rules and leveraging technology to track your days, you can be well-prepared and minimize the chances of facing unnecessary tax liabilities and face an audit with confidence, knowing that your financial well-being is protected. Start your 15-day free trial of Monaeo Personal today.
Nothing in this article should be considered or construed as tax advice. Monaeo does not dispense tax advice and always recommends that taxpayers consult their accountants or lawyers.