What to Expect With New York State Residency Audits
In the last few years, New York has ramped up its focus on residency audits. The Department of Taxation and Finance is sending out thousands of residency audit letters in an attempt to find people who claim to live in other states to avoid their NY tax liabilities. Residency audits aren't new in the Empire State - between 2013 and 2017, the state conducted over 15,000 residency audits.
But here's the twist. In the past, residency audits were field audits where auditors came to your home or business and met with you face-to-face. Now, the state starts the audit process with a desk audit, meaning taxpayers will receive letters from the automated system long before an auditor is ever assigned to their case. This setup allows the state to cast a much wider net in its pursuit of non-compliant taxpayers.
Whether you've been contacted about a residency audit, are worried about a residency audit, or are considering moving out of state and want to avoid an audit, here is an overview of everything you need to know. To get help now, use TaxCure to search for a tax pro in your area.
What Is a New York State Residency Audit?
A residency audit is when the tax agency looks at where you live to ensure that you are paying the right state and local taxes. For example, if your tax return says that you live in Florida, but the auditor believes that you live in New York City, you will need to prove that you live in Florida during the audit. Unlike traditional NYS state tax audits, residency audits don't focus on the numbers, just the question of residency.
Why Does NY Do Residency Audit?
Money. NYS does residency audits to ensure that the DTF can collect as much tax as legally possible. The audits find fraudulent residency claims and assess the correct tax against people who have filed with an incorrect residency status.
The state has one of the highest individual income tax rates in the country, and to avoid paying their liabilities, some taxpayers claim that they live in other states.
What Determines New York Residency?
There are a few different ways that you may be classified as a New York State resident. First, if your domicile is in New York, you are a resident. Your domicile is your permanent home, the place you return to after vacations, business trips, studying away from home, or military assignments.
Based on statutory residency rules, you are also a state resident if your permanent place of abode is in New York State and you spend 184 or more days in the state. A permanent place of abode is a place that you permanently maintain, suitable for year-round use, and it can be owned or rented.
Exceptions to the New York State Domicile Rule
There are some exceptions to the rules.
First, under the 30-day rule, you are not a resident if your domicile is in New York and all three of the following apply:
- You didn't have a permanent place of abode in New York State during the entire tax year.
- You had a permanent place of abode outside of the state during the entire tax year.
- You spent 30 days or less in New York State during the tax year.
Additionally, under the 548-day rule, you are also not a resident if your domicile is in New York and the following all apply:
- You were in a foreign country for a minimum of 450 days during the last 548 days (about 18 months).
- You, your spouse (unless you're legally separated), and your minor children spent 90 days or less in New York during the last 548 days.
- During the parts of the tax year surrounding the 548 days during which you were a non-resident, you were in state at the same ratio to 90 as you were during the 548-day period.
The last element is a bit confusing. Here's an example. Say that you were in New York just 55 days of the 548-day period. That is a ratio of 1/10. If you multiply this by 90, you get nine. That means that you could only be in the state nine days or less during each of the parts of the tax years surrounding the 548 days. The number of days varies based on the situation.
Part-Year Residents
A part-year resident is anyone who meets the residency tests at some point in the year. For example, say that you have your domicile in New York for six months, and then you move your domicile to Florida. That means you were a New York State resident for half of the year.
What to Expect During a Residency Audit
First, you're likely to receive a Nonresident Audit Questionaire, which asks for proof of address during a specified tax period. Based on your answers, the DTF may send you an Information Document Request (IDR) asking for documents that shed more light on your residency status.
The documents the state wants to see vary, but they may want information related to the number of days you were in New York during the audit period, such as cellphone records, credit card statements, or utility bills. If you have two homes (one in New York and one in another state), the DTF may request details about the sizes of the residences, the location of family members, the location of items of value, and other details to assess where you spend your time.
Triggers for New York Residency Audits
The state has hundreds of auditors working in several district offices throughout the state, and as explained above, the state is also sending out automated letters about residency audits and is wondering if you will get audited. The number one trigger is being a high-income individual whose returns show that you moved out of state.
However, the state may also audit you if your return shows significant financial transactions with a recent residency change, changes in employment or business locations, or property purchases or sales in New York.
How to Prepare for a Residency Audit
Preparing for a residency audit is tricker than other audits because there are so many subjective elements. To get started, gather financial records and information about your proof of residency from the year being audited. Then, talk with a tax professional about what's going to happen.
Focus on collecting records that show where you were on every day of the tax year. Cell phone records and credit card statements can be extremely useful.
When trying to establish your domicile, the auditor will consider the following:
- Home - If you have multiple homes, when did you acquire them? Where do you spend most of your time? What is the relative size and value of each home? Where do you spend your holidays? Are you connected to the community?
- Business involvement - Where are you employed? Where does your income come from? Where do you work on a day-to-day basis? If you're a shareholder in a New York business, what's your level of participation?
- Time - If your domicile is in New York, you are a resident regardless of the time spent there (unless you meet one of the exceptions noted above). The 183-day rule doesn't apply to domicile tests. How much time do you spend in New York versus other areas? Have your patterns changed since you moved your domicile?
- Near and Dear - Where do you keep your sentimental and financial valuables? Where are your personal items?
- Family - Where do your family members live? Where do your children attend school?
As you can see, those factors don't include voter registration, driver's licenses, bank statement addresses, and similar factors. The auditor will take those elements into account. They can help to build your case, but the auditor will not determine residency based on those factors alone.
The audit may be slightly clearer if you don't have a domicile in New York and are dealing with a statutory residency claim. However, even then, you will need to prove where you were nearly every day of the tax period under audit. Note that days you were only in New York to catch a plane, boat, or train do not count. Also, days where you received inpatient care do not count, but if you come to New York for an outpatient appointment, that counts.
Potential Outcomes of Residency Audits
The auditor may agree with the claims on your tax return, whether you claim to be a non-resident or partial resident. They may determine that you are a partial resident for a certain number of days. Or they may determine that you are a full-time New York resident.
If the auditor changes the residency status on your tax return, you will incur a New York State tax liability plus interest and penalties. The auditor may assess late payment penalties or stiffer audit penalties. At that point, if you agree with the results of the audit, you can pay the tax bill. If you cannot afford to pay in full, you may be able to set up a payment plan or even settle through an offer in compromise.
If you disagree, you can appeal. You typically have 90 days to appeal, and the sooner, the better. The appeals process can be confusing, and you will generally need to present new information about your case. You should definitely work with a tax pro through this part of the process.
How to Avoid Failing a Residency Audit
If you've recently moved, re-established your domicile, or are worried about a residency audit for any other reason, you may want to do some prep work. Then, if the state selects you for an audit, you have the details you need.
Note the elements the IRS considers when establishing a domicile and make sure that you have a solid argument for your domicile being in another state. If you are dealing with statutory residency, pay very close attention to the number of days you spend in New York, and don't spend more than 183 days in the state. Track your location with your phone or by spending money on a credit card every time you're in New York.
FAQs About New York Residency Audits
How long does a New York residency audit typically take?
New York residency audits take a long time. Expect to spend at least six months to a year dealing with the process.
What is the 183-day rule?
The 183-day rule is used by many countries and states to establish residency for tax purposes. The rule states that a taxpayer is a resident if they spend more than 183 days in a tax jurisdiction. New York State, New York City, and Yonkers use 184 days as a threshold - if you spend 184 or more days in the state, NYC, or Yonkers and have a permanent place of abode, you are a resident of those respective places.
What if I filed with the wrong residency status in New York State?
The DTF may contact you about a residency audit. To get back into compliance and to minimize consequences, reach out through the state's voluntary disclosure process. You can only qualify if you contact the DTF before an auditor contacts you.
What are the residency rules for New York City?
NYC uses the same residency rules as the state. If you have a domicile in New York City, you are a resident, unless you meet one of the exceptions outlined above. Similarly, you're also a resident if you maintain a permanent place of residence and spend at least 184 days per year there.
What are the residency rules for Yonkers?
Yonkers uses the same residency rules as the state. If you have a domicile in Yonkers, you are a resident unless you meet one of the abovementioned exceptions. You're also a resident if you maintain a permanent residence in Yonkers and spend at least 184 days there.
What if I have multiple homes?
Even if you have multiple homes, you only have a single domicile, and if your domicile is in New York, you are a resident for tax purposes. The term domicile means the permanent and primary residence where you return after being away.
Once you establish a domicile in New York, you must prove that you have abandoned it and established a domicile in another state if you no longer want to be considered a state resident. There is some subjectivity here, which is why it's important to work with an audit attorney if you have a complicated residency situation.
What if my domicile is in another state?
Even if your domicile is in another state, you may be considered a resident for tax purposes if you meet the rules for statutory residency. This occurs if you spend 184 or more days in the state (partial days count as full days) and you maintain a permanent place of abode. Note that any day you are in New York counts, even if you don't go to your permanent place of abode.
What if I'm a non-resident with a New York income?
If you received New York-source income, you may still have to pay state income tax, even if you are not a resident. There are different tax rules for non-residents in this state.
What if I only lived in New York for part of the year?
Part-year residents should first calculate their tax as if they are full-year residents. Then, they should determine the portion of the year spent as a resident of New York, and they should pay that percentage of the tax.
What if I lived in New York and earned income from other places?
As a New York resident, you must pay state and city (if applicable) income tax on all of your income, whether it was sourced from New York or another state. If you are a non-resident, you only have to pay state income tax on your income sourced from New York state.
What if I'm a NY resident with income sourced from another state?
You may need to pay state income tax based on the tax code in the state where the income was sourced. However, in that case, you can generally claim a credit for the state taxes you paid to the other taxing authority.
What are New York's residency rules for college students?
Full-time undergraduate students are generally considered to be residents of New York State if their parents live there. In 2009, the state amended its rules to state that dwellings maintained by full-time students in undergraduate programs while attending an institution of higher learning are not considered to be permanent places of abode.
To put that more simply, a student's dorm or apartment in another state doesn't qualify as a permanent place of abode. Generally, however, their parents' home counts as their permanent place of abode. Thus, even if they didn't spend a certain number of days in the state, most undergraduate college students are considered to be residents for income tax purposes.
Get Help With NY Residency Audits
New York state income tax ranges from 4 to 10%, and if an auditor changes your residency status, it can lead to a harsh tax bill. To get help now, use TaxCure to search for a tax professional today. Search for a pro based in your area with the experience you need. Then, review the options until you find the best fit for your needs.
Article Sources
https://www.tax.ny.gov/pit/file/pit_definitions.htm
https://www.tax.ny.gov/pit/file/nonresident-faqs.htm#income
https://www.tax.ny.gov/enforcement/criminal_enforcement/audit_conclusion.htm
https://news.bloombergtax.com/daily-tax-report-state/the-tax-auditors-are-coming-for-ex-new-yorkers