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Inferences, Conclusions, Relationships, and Residency Audit Traps

11.25.19 | SALT Chat

There are two very disparate pursuits in which I have partaken for almost 30 years; marriage and residency audits. While the burden of proof in relationships and audits may be different, inferences drawn and conclusions reached hastily can be a disaster for both. While no one knows the rules for lasting relationships, readers of my blog know that many jurisdictions use a two-pronged approach to determining whether an individual taxpayer is a resident for state tax purposes.

First and foremost is domicile. With certain exceptions, if an individual is domiciled in a state, they will be a tax resident of a state. The so-called statutory residency test looks to whether one has a permanent place of abode in the jurisdiction and whether more than 183 days have been spent in the jurisdiction. I have blogged extensively about the intricacies of these tests and browsing through the previous blogs at https://blogs.berdonllp.com/topic/salt-talk is highly recommended.

While I would love to list some of the inferences to be drawn, conclusions (false or otherwise) reached and relationship consequences thereof, my spouse has strongly advised me to stick to what I know best. Here are some of the inferences, hasty conclusions, and traps I have heard over the years.

“I was in State XX for less than 183 days. Clearly, I am not a resident.”

  • This is one of the biggest mistakes we see that taxpayers (non-clients, of course) make. Don’t forget about the domicile test. If you have “lived” in State XX for the last 50 years and have done nothing other than count your days, you’ve got a long audit and a big tax bill ahead of you.

“Not only did I count my days in State XX, but I changed my license, voter registration, and car registration to Florida. I even went to the County Clerk and made a declaration of domicile so that I can get the ever-popular homestead exemption.”

  • This is why I cringe when I am asked for a “list” of things to do to change my domicile. I have had to succumb to the pressure and deliver. But believe me, we give a detailed explanation of domicile first, apply this to the client’s particular set of facts, and explain that these secondary factors are just the window dressing. Yes, they are important to do, but a change of domicile contemplates real lifestyle changes.

“Of course I changed my domicile. My dog isn’t in New York City with me. He is at the Connecticut home.”

  • While “location of dog” hasn’t yet been listed as a formal domicile factor, near and dear items (and certainly a pet can be one) is a factor that is examined in determining domicile. I have had an auditor conclude that the Connecticut dog was the “farm dog” and that the taxpayer’s extensive art collection, jewelry, family photo collection, and three large walk-in closets were much more near and dear than Rover.

“Auditors often jump to the conclusion that because a credit card charge is reflected on a certain day, the charge must have been made on that day. Therefore, the 183 days I said I was in New York now becomes 184 and I am deemed a tax resident.

  • I’m dating myself a little here, but it was much more common than it is now for merchants to process credit card transactions a day or two after the charge took place. One of the first cases I ever worked on involved a taxpayer who was over the limit by one day. He swore he wasn’t in New York on the day in question. My manager at the time (he is probably reading this and knows who he is) dragged me to the fancy hotel restaurant in question for lunch. Sure enough, the charge appeared on his credit card one day later than we were there. So, after explaining to his wife why he had a large hotel charge in the middle of the day and both of us presenting the auditor with affidavits as to the day we actually had lunch at the hotel, all was well and our client, “Easy Ed” prevailed.

“I swore to the auditor that I have never spent a weekend in New York, yet a telephone call was made from my NYC apartment on at least 3 weekends during the audit period. Not only did the auditor jump to the conclusion I must have been in the apartment and added to my day count, he now questions the credibility of any pattern I have attempted to establish regarding my weekend behavior.”

  • We all know what happened here. You let a friend, child, a friend’s child or a relative stay in the apartment for the weekend. They forgot you asked them not to use the phone. My advice; get rid of the land line. Everyone has cell phones these days. But I am not telling you this to conceal your presence as the taxing authorities will be more than happy to subpoena your cell phone records and attempt to pinpoint your location.

I can go on forever, but I am already well over my suggested blog space limit. The morale of the story here is you need an experienced practitioner to help debunk the inferences that are going to be made by the inexperienced or worse, out to get you, auditor. We haven’t seen it all, but we’ve seen a lot and can help you avoid falling into the traps or false indicators that can ruin an otherwise successful audit outcome.

If you are fearful of, expecting, or just want to protect yourself from a residency audit, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.

Wayne Berkowitz, a tax partner and co-leader of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.