Leaving New York to Get Tax Relief? Prepare to Be Audited

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Gerald B. Silverman

Wealthy New Yorkers who plan to flee to more tax-friendly states like Florida should expect to be audited, tax practitioners told Bloomberg Tax.

Tax advisers have put together lengthy checklists for clients who want to leave the state as a result of the new federal tax law’s $10,000 limit on state and local tax deductions. It’s not enough, for instance, to simply register to vote and get a driver’s license in the new state, they said.

“Essentially, you have to cut your contacts with the state if you want to sleep at night,” said Stanley Ruchelman, chairman of the law firm Ruchelman PLLC in New York. “And that means all contacts.”

New York has been concerned about a taxpayer exodus since President Donald Trump signed the 2017 federal tax act (Pub. L. No. 115-97) into law in December 2017. The state enacted two workarounds—a new charitable deduction and a voluntary payroll tax—to help alleviate the higher tax burden and prevent tax flight.

State Budget Impact

When the workarounds were proposed, Robert Mujica, state budget director, said the loss of even a small number of high-income taxpayers would cripple the state budget and lead to large budget deficits. The concern is based on New York’s “top-heavy” personal income tax base, said E.J. McMahon, research director of the conservative-leaning Empire Center for Public Policy.

The highest-earning 1 percent of state taxpayers generate about 40 percent of state income tax revenue, and the state’s fastest growing group of high-income taxpayers are nonresidents, McMahon said in an April report.

A significant amount of tax revenue is at stake for New York. The state received $728 million in personal income tax revenue from 200,894 part-year residents in 2014, according to the most recent data available from the Department of Taxation and Finance. It also received $6.1 billion in tax revenue on the New York source income of 761,117 full-year nonresidents in 2014.

The state gets about 17 percent of its personal income tax revenue from nonresidents, and the percentage has grown significantly over the past decade, according to data from the State Division of the Budget. The state received 1.2 million nonresident tax returns in 2015, a 35 percent increase over 2005, according to the division’s data.

New York has two rules for defining what constitutes a resident for tax purposes—a domicile rule and a statutory residency rule. The statutory rule is relatively straightforward and generally defines a resident as someone who isn’t domiciled in the state but maintains “a place of abode” and spends more than 183 days in the state.

Domicile Rule

The domicile rule, however, is more complicated and has led a number of tax practitioners, including Ruchelman and Mazars USA LLP, to provide a detailed checklist for clients who want to sever ties to the state.

New York, under its 128-page audit guidelines, which were issued in 2014, will look at many things, including involvement in businesses, family connections, time spent in the state, and things “near and dear” to the taxpayer such as where they keep family heirlooms and art. There is a five-part test of “primary factors” and an eight-point list of other things the state will examine, such as bank statements and E-ZPass toll records.

Harold Hecht, director of the state and local tax group at Mazars, told Bloomberg Tax that New York has always kept a close eye on claims for changes of residency, a potential red flag for audits. “I’m sure they’re going to continue to focus on it,” he said. “The more of them they see, the more of them they’re going to pursue.”

James Gazzale, a spokesman for the Department of Taxation and Finance, declined to comment on whether the state might step up its residency and domicile audits.

“We don’t publicly discuss our audit strategy,” he said in an email. “Ensuring taxpayers pay their fair share is a top priority. Therefore, our nonresident audit program continues to be very active.”

Jennifer S. White, an associate in the New York office of Reed Smith LLP, said she expects more audits, but also expects the state to settle for less money.

“I’m seeing taxpayers want to be more aggressive because of the increased financial impact,” White told Bloomberg Tax, referring to the bigger hit they will take as a result of the $10,000 SALT cap. “I’m seeing a lot of our clients want to keep fighting.”

Checklists

Mazars recommends that taxpayers keep detailed records of everything from ATM receipts to utility bills to E-ZPass records. Taxpayers should keep their involvement in New York businesses, clubs, and voluntary organizations to a minimum, it said.

“What makes everything tricky, is that rarely does someone leave and sever all ties with the state,” Richard D. Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law, said in an email. “There may be continuing family connections, and longstanding relationships with doctors and other health professionals. Some will keep business relationships with the state.”

Ruchelman created a checklist of more than 30 items for its clients after the new SALT cap was enacted. It recommends that if a New York residence is maintained, it should be in a resort area. Conversely, a residence in a new location should be in a residential, not a vacation, area.

The firm recommends that bank accounts, brokerage accounts, and a safe deposit box be moved to the new location.

“Your lifestyle has to change,” said Donna M. Cuiffo, senior managing director and chief financial officer at Clarfeld Financial Advisors LLC. “It’s really more than just changing your address.”

Edward A. Zelinsky, the Annie and Morris Trachman Professor of Law at Yeshiva University’s Benjamin N. Cardozo School of Law, said there’s “an enormous amount of misinformation” about becoming a nonresident.

“An individual can spend relatively little time in New York and, depending on the facts, still be domiciled in New York,” he said. “Anyone contemplating a switch to Florida residency would be well-advised to assume that they will be audited.”

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