What to Expect If the DTF Challenges Your NY Residency Status

The New York Department of Taxation and Finance is doubling down on residency audits. Rather than focusing on the financial aspects of your tax return, these audits assess whether or not you are a NY resident, and over the last few years, the DTF has collected billions through these audits.

From 2013 to 2017, state auditors collected about $1 billion from 15,000 residency audits, but from 2022 to 2023, auditors collected over $3 billion from around 750,000 residency audits. Residency audits are extremely specific, and sometimes, cases hinge on a seemingly small detail such as the location of your dog or your Peleton.

New York State has the third highest income tax rate in the country, and failing a residency audit can lead to a significant state tax liability. To protect yourself, you need a skilled NY tax attorney who can guide you through the audit process, help you get the best result possible, and advise you about the tax implications of the residency audit process.

At the Law Offices of Stephen B. Kass, PC we have over 25 years of experience guiding clients through complex tax controversies with New York and the IRS, and in addition to our New York locations, we also have an office in Miami for your convenience. To get help now, contact us today.

What is a New York Residency Audit?

A New York residency audit is when the NY DTF audits taxpayers to ensure they are reporting and paying taxes correctly based on their residency status. These audits target nonresidents and part-year residents to ensure that they have classified their New York State residency status correctly.

Residency audits look at how much time you spend in the state, your living and working situation, and other details related to state residency. In some cases, you may need to pay state taxes even if you have a residency out of state.

What Determines New York Residency?

The NY Department of Taxation and Finance considers you to be a New York resident for income tax purposes if either of the following apply:

• Your domicile is in New York
• You maintain a permanent home in New York and spend 184 days or more in New York State during the taxable year.

A domicile is defined as your permanent home or the place that you intend to return to after your vacation, business assignment, or education/military leave. In New York, your domicile is considered to be your domicile until you can demonstrate that you abandoned it and established a new domicile.

Note that spending any part of the day in New York State constitutes a full day for the 184-day rule, and this rule applies even if you are not domiciled in New York.

Exceptions to the Domicile Rule

There are a few situations where you may have a domicile but are not considered to be a NY resident. In particular, if you meet the following three conditions for either Group A or Group B, you are not a NY resident:

Group A

• You didn’t maintain a permanent place of abode in NYS during the tax year, and
• You maintained a permanent place of abode outside of NYS during the entire tax year, and
• You spent 30 days or less in NYS during the tax year.

Group B

• You were in a foreign country for at least 450 days of any period of 548 consecutive days, and
• You, your spouse (unless legally separated), and minor children spent 90 days or less in NYS during the 548-day period, and
• The portion of the tax year that you were a non-resident preceding and following the 548-day period has the same ratio to 90 as the number of days bears to 548.

Remember, you must meet all three of the conditions listed above to qualify for the domicile exception in either category.

The Residency Audit Process

If the DTF selects you for a residency audit, the agency will contact you by mail. The audit notice will explain the type of audit and the documents the auditor wants to see. Note the deadline carefully, and make sure to respond promptly so that the auditor doesn’t conclude the case without your input.

With most audits, you provide details to back up the financial claims on your tax return. For instance, checking account statements or receipts to back up revenue and expenses reported for your business. In contrast, with a residency audit, the types of documents you will need to provide will be much different.

The auditor may ask for details about your travel in and out of the state, but they will also dig into personal details about your living situation to determine where you are domiciled. Some aspects of residency audits are purely factual-such as how many days you spent in the state. Factors related to your domicile, however, can be much more subjective.

For best results, you should not navigate this process on your own, especially if you’re a high-income earner with the potential for a sizeable state income tax bill. In some cases, you may be able to get assistance from your tax preparer, but before engaging their help, talk with them about their experience in residency audits. To protect yourself, find a tax attorney who deals with residency audits on a regular basis.

Common Triggers for a Residency Audit

The Department tends to audit taxpayers who have recently moved out of state or claimed part-year residency status. If you have recently changed from a full-time resident to a part-time or non-resident, there is a chance that you may hear from the Department.

How to Prepare for a Residency Audit

If you are selected for a residency audit, note the deadline and start gathering the requested materials. Consider reaching out to an experienced audit attorney such as the Law Offices of Stephan B. Kass\ PC to help you.

Potential Outcomes of a Residency Audit

Residency audits can be resolved in the following ways:

• The auditor agrees with the residency status claimed on your tax return, and they make no changes to your return.
• The auditor determines that you were a part-year resident and assesses state tax accordingly.
• The auditor determines that you were a full-time resident and assesses state tax accordingly.

Note that part-year residents pay taxes based on the portion of the year for which they were considered to be New York residents. If you claimed that you were a part-year resident, the auditor may determine that you were a resident for a different period of time than specified on your tax return.

New York taxes income over the exempt amount at a rate of 4 to 10.9%. If you have a taxable income of $1 million, you can expect to pay close to $65,000 in state income tax if the auditor determines that you are a full-year resident. As your income climbs, so too does the financial risk of failing a residency audit. The state also taxes capital gains at the income tax rate.

Failure to pay state taxes can lead to penalties and interest. The state can also take involuntary collections against you, including income executions, bank levies, and asset seizures.

Responding to an Unfavorable Audit Decision

If you disagree with the results of the audit, you have the right to appeal. Typically, you must appeal by the deadline or you will lose the opportunity, and the tax assessment will be finalized. If you went through the audit on your own and now want to appeal, consider working with an attorney. They can help strengthen your argument and find items that were not presented during the original audit.

While the DTF may be flexible on some deadlines during the audit process, that is not the case when you get to appeals. The DTF is unrelenting with most appeal deadlines.

FAQs About New York Residency Audits

Can travel records impact a residency audit decision in New York?

Your travel records will play a significant role during the residency audit. Even if you only spent a few hours or a couple of minutes in the state, auditors will count that as a full day in relation to the 184-day rule. Even landing your private jet a few minutes before midnight can be constituted as spending that full day in the state.

What happens if I fail a New York residency audit?

If you fail a residency audit, you will face New York state income tax on your income for the days you were considered to be a resident of the state.

What types of proof can show non-residency in New York for tax purposes?

Auditors will want to see information about your homes, your travel schedules, and where you work. Unfortunately, providing residency in another state doesn’t necessarily mean that you will not be considered a resident for NY tax purposes.

With billions of dollars of tax revenue on the line and hundreds of thousands of taxpayers leaving the state every year, the DTF is very serious about residency audits. If you’ve been contacted about a residency audit or are unsure of your residency status for tax reporting purposes, contact us at the Stephen B. Kass Law Firm today. We will leverage our knowledge and experience to help you get the best resolution possible.