Many people get a second home without understanding the tax implications. Whether it’s maintaining a vacation home, an apartment close to work or a place to snowbird, one of those homes could lead to a big tax bill. Residency audits are a common way for states to collect money. New York State is particularly aggressive in going after taxpayers. People assume that they can easily change their residency but if they do it wrong, the taxman will come. However, now technology has the power to help taxpayers avoid or win a tax audit. Mobile apps, like TaxDay, can keep track of your travel to multiple tax jurisdictions in real-time using GPS technology to help ensure you don’t exceed day counts and can easily prepare tax returns or prove your case in the event of an audit.
In New York, there are two tests for residency. The domicile test looks at the taxpayer’s domicile — that is, the location of the one place the individual intends to have as a permanent home. The State will look at a range of factors, such as where the individual’s family resides, where he/she conducts business activities, and the relative use and size of each home.
The other test is the statutory residency test. Someone who is not considered to be domiciled in New York could still be considered a resident for income tax purposes if they maintain a “permanent place of abode” and spend more than 183 days of the year in New York.
Residency audits are very document-intensive and personally invasive. Taxpayers have the burden to prove their whereabouts. This means they must prove a negative: that they were not in the state. Many people have a hard time proving their case because they don’t keep careful records. However, auditors will piece together a taxpayer’s whereabouts using appointment calendars, credit cards, passports, phone bills, EZ-pass records, and other documents. They can also look at smartphone applications that track and record location, to determine whether the taxpayer met either of the tests for residency. While that technology can hurt you if you are not being honest about your whereabouts, it is also a big help in fighting an audit when you know you weren’t in the state.
Benefits of technology
Since most of us carry our phone with us all the time, mobile apps are very useful for keeping track of when you are in a particular state or city. For example, TaxDay can monitor how long you spend in a designated city or state and provide automatic notifications when you are getting close to reaching the 183-day threshold. Features to look for in choosing an app for yourself include having the ability to append notes, receipts, itineraries, and other pertinent information so your records are all in one place. In addition, it is helpful to have a reporting function, so you can generate a year-end report that provides you and your tax preparer with all information needed to file your taxes, including a summary of your travel in each jurisdiction, complete with travel records and receipts to support your residency status filing.
Whatever method you choose, just remember to keep those records. They will be a huge time and money saver in the event you are audited.
If you receive notice of an audit, contact a qualified tax attorney for assistance.