Summer is around the corner. Kids are wrapping up the school year, and the weather is warming. Those lucky enough to be snowbirds are packing bags and heading to the Sunshine state. But beware, state tax authorities are ready to challenge your 'non-resident' tax return status. If you plan to report you've been working from a tax-free state like Florida, read on.
Snowbirds who relocate to tax-friendly states can expect to suffer through residency audits from high-tax states like New York. It can mean the difference between paying no income tax and owing tens of thousands in an audit. Notorious for their attention to detail, auditors will leave no rock unturned to prove you're a resident.
While we reference New York throughout this article, the issues addressed are substantially the same in other tax jurisdictions such as California, New Jersey, and Connecticut.
Demystifying Residency Audits
Juggling multiple homes means juggling numerous tax returns. When filing in a state you have ties to, you can file as a full-year resident, part-year resident, or non-resident. The classification you choose determines how much you owe in state taxes. But, just because you believe you are part-time or non-resident doesn't mean the tax authorities will agree.
If you're unlucky enough to receive a state residency audit, the state will examine detailed records to verify (or disprove) your non-resident status. Many people who claim they are a non-resident or part-year residents are being proven wrong by auditors. This ugly outcome results in more taxes owed, significant penalties, interest, legal fees, and a time-intensive intrusion into your personal life. New York state won 52% of its residency audits, collecting around $1 billion in unpaid taxes.
You may have multiple residences, but you can only have one domicile. Your domicile is where you call home and where you intend to return to, eventually. Your intent is the key to determining your domicile.
Establishing a domicile is not as simple as getting a new driver’s license or filing a change of address. Avoid double taxation by paying close attention to the factors auditors pay attention to.
Auditors look at many factors when determining your full-time residence/domicile. Four of the most important factors for a New York auditor include your home, your business ties, where you keep your most valuable possessions, and how much time you spend in the state.
Auditors look at the primary address listed on your tax return, bank statements, and bills. They may even examine your phone usage, analyzing telephone services at each residence, including the nature of the listing, the type of service features, and the activity at the location.
Your Business Ties
Are you actively involved in business within state lines? Active business involvement includes participation in a New York trade, business, occupation, or profession and/or substantial investment in, and management of, any New York-based closely held business such as a sole proprietorship, partnership, limited liability company, and corporation.
Near and Dear
“There’s no place like domicile” doesn’t have the same ring as “no place like home,” but the warm and fuzzy feeling that home brings helps determine domicile. Also known as the “teddy bear test,” auditors assess the things you hold “near and dear,” like art collections or family heirlooms. They’ll ask for insurance policies and other records to analyze these details and see where your most precious items are stored.
While intent is a significant factor in determining New York domicile, another factor can make it very difficult to give up your New York domicile — and that is time. If you continue spending more days during the year in New York compared to the state you claim as your domicile, auditors will argue that you never ‘left’ New York. Their claim: it is only reasonable to expect that you spend most of your time at ‘home.’
Statutory Residency Test
If you convince auditors of your clear intent to leave the state and prove you changed your domicile, auditors can use the statutory residency test to win their case.
An auditor can claim you "maintain a permanent place of abode" in New York "and spend more than 183 days" a year there, making you a resident of New York for tax purposes. Many states follow the 183-day count and people juggling multiple residences keep a close eye on this number. Don't forget to pay attention to the details. What does your state consider a day? New York, for example, considers any amount of time as a day.
Under New York's statutory residency rules, if you maintain a permanent place of abode—somewhere "maintained" that is "suitable for living year-round," you could be considered a resident. If you have unrestricted use of the residence, even if someone else is covering the expenses for more than 11 months in the year, it qualifies as a permanent place of abode.
A taxpayer who maintains a permanent place of abode but isn't a domiciliary of New York is treated as a resident after spending 183 days of the taxable year in the state. And for state income tax purposes, that is practically the same as not having changed your domicile out of New York. You get to pay taxes on your income from all sources as if you never left New York.
Avoiding New York Residency
The most straightforward way to avoid New York residency, spend less than 183 days in the state. Keep detailed records of where you spend time. Be prepared to prove, credibly, that you were not in New York on the dates in question. Be diligent about your day count and know your state’s residency requirements. In New York, the burden of proof is on you (the taxpayer), and your evidence must be “clear and convincing.” In other words, you are ‘guilty until you prove otherwise.’
New York’s guidelines also require “contemporaneously maintained diaries or calendars supported by credible testimony.” Auditors are relentless about details and go well beyond spot-checking diaries. Residency audits are invasive, with auditors going to extremes, checking property records, bank statements, EZ pass information, and cell phone records obtained under subpoenas. Some auditors even go so far as to interview doormen and verify doctors’ appointments.
Always be prepared for a residency audit. The more thorough and prepared you are, the more likely you’ll avoid a bigger tax bill. Keep reliable and well-supported records. Remember, individuals can be audited every few years. In some states, like California, auditors can review every tax return filed. That means you not only need to keep track of your whereabouts with meticulous detail, but you also need to be organized enough to pull records from past years.
Residency requirements can vary by state, and the guidelines can be nebulous. Get expert advice on the issue. You don’t want to go it alone when navigating residency rules. If you’re living or working across multiple states, talk to your CPA or legal team to understand your state’s residency requirements for tax purposes.
Technology to the Rescue
Being prepared for a residency audit is a lot of work. That's why we built the Monaeo Personal Edition. People who have used Monaeo's data in audits have had 100% success rate in defending their non-residency or part-year residency status and have saved tens or hundreds of thousands of dollars, even millions.
Our companion mobile app privately and automatically counts your days for you by working in the background of your smartphone. Sophisticated algorithms produce reliable reports and analytics, helping you establish your residency status and prove where you were throughout the tax year. Monaeo is the only application whose data has been used in audits, even with aggressive jurisdictions like New York state and New York City. Auditors have many legal and digital tools at their disposal, but many still fight audits with paper receipts and calendars. We are now in a time when we can put these manual, paper-based methods aside — which leave us practically defenseless — and leverage the right technology at our fingertips.