Avoid a Residency Audit 

Jacquelyn Himes, CPA
Focused on You. Dedicated to Your Success.
July 8, 2019

People are on the move. Some people base their decision on where to move on the state’s tax rates. 
This is especially common for high net worth retirees. Florida is a great example. Many people move from highly taxed New York and New Jersey to avoid paying income taxes. According to the 2019 State Business Tax Climate Index published annually by the Tax Foundation, New York (ranked 48) and New Jersey (ranked 50) are among the 10 states with the highest tax rates. Florida, on the other hand, is among the 10 states with the lowest tax rates. The overall ranking for the Sunshine State is four. Florida ranks number one for its income tax rate, two for its Unemployment Insurance Tax Rate, 11 for its property tax rate, and 22 for its Sales Tax Rate. In comparison, states in the tri-state area are ranked highest almost every tax category as follows:
In an article published on June 4 in Accounting Today entitled 4 Red Flags That Can Trigger a Residency Audit the author, Anupam Singhal, suggests that states will increase the number of residency audits performed. Singhal claims that there is a 100 percent chance that you will be audited if you are a high-net-worth or high-income individual who moves to a state with a low tax rate. As far fetched as it sounds, here are the four red flags the Singhal says will cause you to be audited:

1. Moving to low- or no-income tax states 
Since high tax states are losing millions of dollars in tax revenue when people move, they are becoming more aggressive with domicile, residency, and non-residency audits. 

If you move make sure that you are prepared to prove that you are a resident, you intend to stay in that state and are spending the majority of your time there. This includes getting a driver’s license, new license plates, registering to vote in the new state, establishing relationships with professionals located in the state like doctors, lawyers, bankers and insurance agents. 

2. Purchasing and traveling between multiple permanent abodes
Taxpayers who own multiple homes in different states and travel back and forth between them are more likely to be audited. Make sure that you change your domicile. Technically, a domicile is a person’s fixed, permanent, and principal home that they reside in which they intend to return to and/or remain in. Which means for those who have multiple residences, or may be living somewhere else temporarily, where they live may not actually be their domicile. 

The example that Singhal provides is of a snowbird couple who changed their domicile from New York to Florida, and may still own a home in New York to which they frequently travel. They would need to be careful about how many days they spend in New York. If they go for more than 183 days, New York will consider them New York residents and will tax their income. 

People with homes in multiple states may find it difficult to prove their domicile. This puts them at risk of being taxed on their worldwide income in every state in which they have a home.

3. Moving shortly before selling a business
Taxpayers who move and then sell their business shortly afterwards are also at risk of being audited. In this case auditors will look to see if the person is still involved in the business, travels to attend meetings at the place of business, or communicates with new management team for an extended period of time. 

Business owners who relocate their businesses to a new state may be audited as well. Make sure that you file for a change of address with the IRS. You will also have to file your business with the state tax authorities.

4. Moving shortly before selling a large amount of stock or other asset that results in a capital gain
Selling a large amount of stock or other asset that results in a taxable capital gain could also trigger an audit for high-net-worth individuals. The best way to minimize risk is to establish proof of change of domicile. Taxpayers should also create a digital record of their location data leading up to the financial event, through the financial event, and afterwards. 

Feel free to call any member of our team at 610-828-1900 with questions. You can also contact Jackie Himes, CPA, director – tax services at Jacquelyn.Himes@MCC-CPAs.com or me at Marty.McCarthy@MCC-CPAs.com . We are always happy to help. 

Martin C. McCarthy, CPA, CCIFP
Managing Partner 
McCarthy & Company, PC 

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).