Page 2 - Could The Tax Cuts and Jobs Act Mean More State Income Tax Audits?

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COLUMNS I Tax Practice & Procedure

therefore, need to establish that they have the above factors will weigh decisively in 183 days in New York during the tax
abandoned their New York domicile and favor of such a change. Selling one’s year. If a state auditor cannot overcome
have established a new domicile in a dif- home in the prior place of domicile and the taxpayer’s demonstration of a change
ferent state. Because domicile is a subjec- purchasing a home in the new location is of domicile, the auditor will try to estab-
tive inquiry that requires determining a tax- advisable. A taxpayer who wishes to lish that the taxpayer is a statutory resi-
payer’s intent and what is inside a taxpay- maintain a home in New York should dent. For purposes of this test, a perma-
er’s mind, the determination of domicile is consider renting or buying a smaller res- nent place of abode is any dwelling avail-
both difficult and prone to disagreement. idence that will, when objectively com- able to the taxpayer in a residential capac-
In order to determine what a taxpayer’s pared to the new home, demonstrate that ity for substantially all of the tax year. A
true intentions are, states and taxpayers will the New York residence is secondary in pied-à-terre certainly qualifies as a per-
look at the taxpayer’s conduct and actions nature. Continued employment and busi- manent place of abode, while corporate
in order to determine the taxpayer’s intent. ness connections in New York will also apartments may also qualify depending
The difficulty of determining whether a weigh against a change in domicile. on the circumstances.
change in domicile has occurred is espe- Taxpayers changing domicile should also For purposes of meeting the 183-day
cially noteworthy because the taxpayer is be mindful of the time spent in the new threshold, spending even one minute in
the one required to prove the change. In location as compared to the old. New York counts as a full day. A New
New York, for example, a taxpayer claim- Continuing to spend significant amounts York day will count as such even if the
ing a change of domicile to Florida would of time in the former state of domicile taxpayer does not visit his New York res-
be required to prove such change by “clear may not square with a real change. idence during that day. States and taxpay-
and convincing” evidence, a legal standard In addition to these factors, states will ers now use increasingly sophisticated
that is above and beyond the “preponder- often look at many other factors that can tools to determine a taxpayer’s day count;
ance of the evidence” standard that is often speak to the taxpayer’s true intentions. As these can include mobile phone location
applicable in civil litigation. one might imagine, an audit to determine data, credit and debit card usage, and even
Knowing how states reach domicile a taxpayer’s domicile can be quite intrusive apps that track and monitor physical loca-
determinations can help taxpayers and and will require the presentation of infor- tion. Because statutory residency is mea-
their advisors plan accordingly. A taxpay- mation regarding very personal aspects of sured on a year-by-year basis, taxpayers
er looking to change her domicile will the taxpayer’s life, movements, and family, who are statutory residents of a state are
need to make sure that her actions clearly areas that are usually not central to other often subject to repeat audits to determine
and adequately convey and demonstrate types of tax audits. A high-earning taxpay- their status for each tax year.
her intentions. New York uses five pri- er who leaves a state like New York in
mary factors to gauge whether a taxpay- search of sunshine (and lower taxes) in Proceed with Caution
er’s stated intention to change domicile Florida should expect a residency audit; While the examples in this article
matches up with what the state believes the question is often a matter of when, not use New York State residency rules,
to be her true intentions: if. During such an audit, taxpayers can many other states use similar rules
n The size, value, and nature of use of expect to have their personal diaries and and concepts in determining residency
the taxpayer’s former New York resi- calendars inspected, their toll-tag records status. Thus, taxpayers looking to
dence compared to the size, value, and analyzed, their cell phone records leave a high-tax state should seriously
nature of use of the residence in the new reviewed, and their New York pied-à-ter- consider whether they can do so in a
state of domicile res walked through, among other equally manner that will satisfy the former
n The taxpayer’s employment and busi- intrusive methods of examination. state of residence that they are really
ness connections in both states gone. These individuals need to be
n The amount of time spent in both states Statutory Residency certain that they document their
n The physical location of items that have Even if a taxpayer can overcome the movements, take clear actions that
significant sentimental value to the taxpayer change of domicile hurdle, she is not off demonstrate the desired move, and
n The taxpayer’s close family ties in the hook unless she can also establish that sever ties to the old state while estab-
both states. she is not a statutory resident of the state lishing new formal and informal con-
No one factor is determinative; rather, she is leaving behind. In New York, an nections in the new state. q
all of the factors are weighed individually individual is a “statutory resident” and
and collectively. thus taxed on worldwide income if she Michael Sardar, JD, is a tax controversy
A taxpayer who truly intends to relocate 1) maintains a permanent place of abode attorney at Kostelanetz & Fink LLP, New
his domicile will want to make sure that in New York and 2) spends more than York, N.Y.

66 MAY 2019 / THE CPA JOURNAL