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Note: This is the fifth in a series of articles that will cover strategies for changing residency, surviving an audit, and challenging a negative result.  For discussions of domicile and statutory residency, see Parts II through IV.

The taxation at the state and city level in New York has led many New York residents to change their residency. However, as New York’s income tax base erodes with residents fleeing to Florida and other states, New York intends to keep high-income earners paying state taxes and remaining New York residents for tax purposes.

Notice

The audit begins with a letter from the New York Department of Taxation and Finance. This letter will notify you of the impending audit of your residency status. This letter may include an audit questionnaire, as well as an Information Document Request. The letter will request all this information in a very short amount of time.   Typically, the request will allow you only about three weeks after you have received the letter. This is the initiation of the audit.

The Information Document Request will demand that you send certain records to the auditor. This will seem to be a very personal request. These record requests include tax returns, a written history of your residential and employment history, details on your residence, a copy of your lease or mortgage, diaries and calendars, insurance policies, driver’s licenses, voter registrations, vehicle registrations, credit card bills, financial statements, toll receipts, and even phone records. The auditor is looking for documents that prove you have not changed domicile or that you spent too much time in New York.

At this stage, you will want to have experienced representation. Do not be intimidated by the voluminous request and short turnaround time. This is part of the auditor’s strategy. Your representative should first be able to get an adequate extension to respond so that your response can be thorough and accurately reflect your change in residency.

Tax Period

The general statute of limitations for assessing a deficiency is three years from the date of the filing of the return.  The auditor will need some time to complete the audit.  Thus, the typical lookback period for the audit is the previous two years.

If you leave New York and do not file a nonresident return and no return has been filed with New York, then the three-year clock never starts. In this circumstance, the Department of Tax can audit all the years during which no return was filed, even well beyond the three-year period. Therefore, you should consider whether it makes sense to file nonresident returns upon moving, even if you do not have any New York income to report.

Preparation for the Audit

The best defense of your change in residency is to have comprehensive and organized records. As soon as you receive the notice of audit, begin preparing by organizing all the records in the requested categories. Also, work with your representative to determine what weaknesses your records have. This will enable you to find additional documents to fill in for gaps or missing information. Having records that are well-organized and that are comprehensive makes it easier for the auditor to see your change in residency. This, in turn, makes it harder for the auditor to find that you are still a New York resident.

The Audit

Once you have submitted the requested documentation, the auditor will review what has been submitted. If statutory residency is an issue, the auditor will prepare an internal day count. The audit process can be an ongoing exchange of information with the auditor. Because of this, an audit will take many months and can last for over a year.

Despite the length of time of the audit, you and your representative should take care to be responsive and meet deadlines.

Because of the length of most audits, you may be asked to consent to an extension of the statute of limitations. Consult with your representative to determine whether this is in your best interests before agreeing to an extension. Also, you may receive a notice of an additional audit for the most recent year or two before the first audit has even completed.

The Determination

Once the auditor comes to a conclusion on residency, the auditor will send a notice of proposed audit changes. If the auditor finds there to be New York residency, there may still be an opportunity to provide additional documents, depending upon the circumstances. Also, you may request a meeting with the supervisor at this time, as well. However, the outcome does not often change at this point if you have presented an organized and comprehensive set of documents. Following this, the final notice of the audit changes will be sent, which is the beginning of the appeals process.

Summary

Changing residency out of New York can be difficult to demonstrate. You have the burden of proving the change in residency. Therefore, you should have an experienced representative guide you through the process, organize your documentation, and present a comprehensive set of verifiable facts to demonstrate that you have changed residency.

Contact Whiteman Osterman & Hanna Today

Mr. Shimick is a Partner at Whiteman Osterman & Hanna, LLP, and the leader of the firm’s Federal and State Taxation Practice Group. If you have any questions regarding these developments, don’t hesitate to get in touch with Scott Shimick by e-mail (sshimick@woh.com) or phone (518.487.7678) to see how the Federal and State Taxation Practice Group at Whiteman Osterman & Hanna may be able to assist.