New York Residency Audit

Key Takeaways

• New York residency audits try to uncover if a taxpayer owes state taxes as a resident based on living in New York State.
• Domicile, statutory residency, and other laws impact the outcome of your residency audit.
• Common audit triggers include major financial transactions, moving, or property activity in New York.
• Proper preparation and documentation, including travel and financial records, can help you prove your residency status and get through audits successfully.
• McLaud Law P.C. provides audit representation so you can prove your residency and understand how to stay compliant with New York tax laws.

What Happens During New York Residency Audits?

New York State depends on residents paying state taxes for a significant amount of revenue. Income taxes generate billions of dollars each year for state funding. Because this is such a huge portion of the budget, and because New York taxpayers are required by law to comply with tax law, the State will conduct resident audits to try to recoup lost income from qualifying taxpayers who haven’t paid.

Residency audits involve investigating where a taxpayer lives to ensure they’re paying state taxes in the right state. Some people try to avoid paying taxes in one state by claiming residency in another — for example, they may claim they reside in a state without state income tax, like Texas or Florida, when they really reside in New York.

Why Am I Being Audited?

Tax audits are pretty rare, and most people aren’t audited completely out of the blue. Triggers that may lead to residency audits in New York are:

• You have a high income, and your tax return indicates you moved out of state.
• You’ve had recent expensive financial transactions, like a real estate purchase.
• You own or rent in New York but didn’t pay state taxes.
• You travel a lot in and out of New York.
• Your business changed locations.

Your tax return could be flagged for a few different reasons. When you’re facing a residency audit, make sure you have an idea of what could have triggered it and what’s required of you, or talk to a tax expert for help.

Key Factors in Determining Residency During an Audit

There are a few ways that the NY Department of Taxation and Finance determines residency for tax purposes. In particular, the auditor will determine if you have a permanent place of abode or a domicile in the State, and they also look at how much time you spent in the State. Here’s an overview:

Permanent Place of Abode

A permanent place of abode is a residence that you maintain that is suitable for year-round use. If you have a permanent abode in the State for the full year and you spend at least 184 days in New York during a given year, you’re considered a resident of the State. This law applies whether you rent or own your home, and in this case, it doesn’t matter where your domicile is.

Domicile

Your permanent home is considered your domicile – if you’re gone for an extended period of time, that’s where you return home to. You can only have one domicile, and if it’s in New York, you are considered a resident for tax purposes. A residency audit often focuses on this type of question: if a taxpayer has two or more homes, which one is the domicile?

However, there are two exceptions. If your domicile is in New York, but you meet all three of the points in either of the following categories, you generally are not considered a New York Resident.

30-day or less exception:

You must meet all three of these conditions to get the exception:

• You didn’t maintain a permanent place of abode in New York State during the tax year.
• You maintained a permanent place of abode somewhere else during the tax year.
• You spent 30 days or less in New York State.

548-day rule

Again, you must meet all three criteria to claim an exemption from the domicile rule:

• You were in a foreign country for at least 450 days during any period of 548 days 
• Your spouse and minor children spent 90 days or less in New York during the 548-day period.
• The days you were in New York State during the non-resident tax years are below the number calculated by this formula: number of days in nonresident portion of year divided by 548, multiplied by 90.

To illustrate, say that the 548-day period started 200 days before the end of one year and then went into the first 348 days of the following year. For that portion of year one, you must have been in New York State fewer than 33 days based on (200/548*90), and for year two, you must have been in the State for fewer than 57 days (348/548*90).

Burden of Proof

In these audits, the burden of proof is on the entity claiming the change in domicile. Generally, although there may be exceptions, that means that taxpayers who claim they moved out of state must prove that, but if the department thinks that you have moved into the State, they must prove that.

If you were living in New York during the last tax period, the burden of proof related to residency audits is on you. This means that you have the responsibility to provide evidence to the State that you changed your domicile and meet the requirements to not be considered a resident of New York.

However, if the State is claiming a domicile change from another state to New York, the burden of proof is on the Department of Taxation and Finance to provide evidence that clearly shows that change.

How the Residency Audit Process Works

So, now that you know why New York conducts residency audits and the factors that play a role, let’s look at the audit process.

First, the Department of Taxation and Finance will notify you of the impending audit of your residency status. You may get a nonresident audit questionnaire in the mail, requesting your proof of address for a tax year. Then, you may have to complete an information document request (IDR) to send more records to the State that show your residency details.

Records you may need to send include bills, financial statements, or even phone records that prove you were in another state. Other potential details could be where your family members lived during the period.

After you’ve sent your proof, the State will determine your residency based on its assessments and all applicable state laws. The amount of time this process takes will depend on factors like:

• How much documentation is needed to prove your case
• Your compliance with and prompt response to each request for information
• Frequency of communication with auditors

To speed things up and help your case, make sure you work with a tax professional who can guide you through the audit process and help you understand complex tax laws.

Keep in mind that residency audits don’t focus on financial elements in the same way as other audits. They often use what’s called a “Teddy Bear” test – that means, where do you keep your most important items that are the dearest to you? In some cases, this has even hinged on where you keep your Peloton. 

Steps to Take During a Residency Audit

There are a lot of moving parts involved in residency audits, and you may feel stressed when you’re required to prove your domicile. Take it one step at a time:

Organize Your Records

Get your documentation ready as soon as you’re notified about the audit. Gather all records you have that show your residency status, prove your travel activities, and state your address. Find any bills you have, and review the tax returns you’ve submitted to ensure everything is in alignment.

Find Evidence of Physical Presence or Absence

Think of how to prove that you were in the location you’re claiming. Do you have EZ Pass records that show your whereabouts during a period? Do your credit card statements show purchases that support your case? These are good examples of forms of evidence you’ll need to show the State.

Be Responsive and Communicative

Don’t ignore notices and requests from the State. This will only delay the inevitable audit process. Respond promptly with your information and keep communication open. Be willing to work with the auditor from the start so they can see that you are not trying to hide anything.

Consult an Expert

One of the best things you can do when facing a residency audit is find expert help — and to get it early in the process. Contact McLaud Law P.C. when New York State is requesting information from you about your residency status so you can start off on the right foot.

What Are the Potential Outcomes of a Residency Audit?

Looking at the big picture, consider the two potential outcomes of a residency audit: 

• The State agrees with you, leaving your tax return as you filed it, or 
• The State determines you have a different residency status than you’re claiming, and adjusts your tax return accordingly. 

If a discrepancy is found, remember that you may have to deal with tax penalties and a bigger tax bill from New York. But you do have options if you’re not able to pay the full new amount, like applying for a payment plan or an offer in compromise with the Department of Taxation and Finance.

What to Do If You Disagree with Audit Findings

After a residency audit, the State may propose changes that you don’t agree with. Fortunately, you have options for recourse. The Tax Department allows you to dispute any notice or action if you disagree.

Whatever type of notice you receive about the department’s changes, read it thoroughly and look for information about your protest or appeal rights. Follow the instructions provided to appeal the decision to get the State to reconsider based on your argument and proof. 

Appeal deadlines are strict and the process is complex. Reach out to McLaud Law P.C. when you disagree with the New York Department of Taxation’s decision about your tax obligations.

Tips to Avoid Residency Audit Problems

You want to do everything you can to prevent residency audits. If you’re already in the middle of one, you can still take steps to avoid issues. Consider these tips to avoid problems and have a smoother experience:

Be Proactive

When you’re dealing with certain situations that involve your place of residence, like moving, prepare your defense even if you haven’t been audited yet. Keep detailed records of where you are located physically and where you’re domiciled, including bills and other proof. This way, you’re ready if you get audited.

File Your Tax Returns Accurately

Do your research into how to handle state income tax and filing tax returns when you live in multiple places or have moved. Research New York’s laws about domicile and statutory residency so you know how to report everything properly and stay compliant.

Be Open to Auditors

Always be honest when dealing with an auditor. Never try to fabricate documents or hold back information out of fear that you’ll owe more taxes. Provide as much information as possible and be open about your situation. Having an experienced tax resolution professional communicate with the auditor on your behalf is the best way to protect yourself and ensure you are making the best argument you can.

FAQs About New York Residency Audits

What Is Considered a Permanent Place of Abode for NY Residency Audits?

New York defines a permanent place of abode as “a dwelling place of a permanent nature maintained by the taxpayer, whether or not owned by them, and will generally include a dwelling place owned or leased by their spouse.” 

It needs to be somewhere they can live year-round whether they do so or not, and the Department of Taxation and Finance also considers factors about the “nature of the relationship” the taxpayer has with the dwelling.

How Long Will a New York Residency Audit Take?

The length of an audit will depend on the records you’re able to provide and other details of your situation. But most audits can take months or even a year to complete.

Can I Use Travel Records in a Residency Audit?

Yes, you can use any records that help prove where you were located and for how long, including travel records.

What If I Fail a New York Residency Audit?

The State may determine that you should have been treated as a resident or partial resident and thus paid taxes in New York State. You could face a higher tax bill and tax penalties because of your errors.

How McLaud Law Helps Clients with Residency Audits

New York residency audits can be time-consuming, stressful, and expensive. Rules and regulations can be complicated when it comes to state taxes. Working with a tax attorney can help manage the situation, fight on your behalf, and help you get the best possible outcome. Whether you have a complex living situation across states or you are being audited, McLaud Law P.C. is here to help you get through the problem. 

Contact McLaud Law to talk to a legal expert about your situation today.

This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.