Weekly Round-Up: How to Defend Against New York Residency Audits

New York places a strong emphasis on residency audits, the result of which can be the taxation of an individual's income from all sources rather than only from New York sources, Richard W. Genetelli and David B. Zigman, of The Genetelli Consulting Group, explain in this week's issue of the Bloomberg BNA Weekly State Tax Report.

The sophisticated policies and procedures integrated into New York's residency audit program can place difficult evidentiary burdens on individuals. Supplementing its advanced audit techniques, New York also has computer cross-matching and multi-jurisdictional information sharing resources at its disposal. With no end in sight to the financial challenges brought about by the recession, New York's aggressive use of residency audits as a means of generating additional revenue should continue for the forseeable future.

In light of the foregoing, individuals need to recognize that planning and upfront implementation of strategies are critical to minimize tax and successfully defend residency audit inquiries by New York. Planning and implementation include the development and maintenance of supporting documentation on an ongoing basis. Planning and documentation are crucial for a variety of issues, including change of domicile, taxation of bonus or deferred compensation payments, taxation of income stemming from the exercise of employee stock options, taxation of termination or severance pay, establishing an individual's whereabouts throughout the year, taxation of compensation of transferred employees on temporary work assignments, use of an abode, and allocation of income.

Once an audit inquiry occurs, the factual record will already be set by the conduct of the taxpayer during the audit years. Thus, the best opportunity to impact the results of a future audit inquiry is to modify behavior in the present. For example, a nondomiciliary with a permanent place of abode in New York may be taxed as a resident if more than 183 days are spent in New York during the tax year. However, if an audit is commenced in 2013 for the 2009 tax year, it is too late in 2013 for an individual to change the amount of days spent in New York in 2009. Thus, if an individual spent more than 183 days in New York in 2009 due to one visit late in the year that could have been avoided, all income becomes subject to tax.

Of course, even if an audit is commenced, the outcome can be greatly impacted by properly evaluating the information to be provided, and presenting the information in a credible manner. Even with a difficult fact pattern, the presentation of information in an appropriate light can be the difference between a large assessment and no assessment at all.

For a complete look at how residency audits can be won in New York, check out the complete by  Genetelli and Zigman, found in this week's issue of the Bloomberg BNA Weekly State Tax Report.

In other developments…

Cigarette Taxes and Cigarette Smuggling by State , by Joseph Henchman, and Scott Drenkard of the Tax Foundation.

What the Fiscal Cliff Deal Means for the States , by the Tax Policy Center.

New York State Adopts Amendments to Combined Reporting Regulations , a new alert by Deloitte

Compiled by Priya D. Nair
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