By: The Attorneys of Tenenbaum Law, P.C.

RESIDENCY: New York State is aggressively looking for revenue and an easy target appears to be taxpayers filing as nonresidents of New York. If your clients moved out of state a few years ago and file a nonresident tax return, the State may choose to audit them – especially if they have significant non-NY source income. Here are some points to watch for:

  • The State is looking closely at the check the box line of the nonresident tax return asking whether the taxpayer or the spouse maintained living quarters in NYS during the tax year. The State may assert negligence penalties in a residency audit or in rare cases pursue criminal action based on the answer to this question.
  • The burden of proof is on the party asserting the change in residency. Thus, it is up to you and your clients to show the State, by clear and convincing evidence, that your clients no longer live in New York and are not statutory residents of New York. This means that if there are arguments equally for and against your client=s position, your client loses.
  • The State routinely begins a residency audit by sending out a Nonresident Audit Questionnaire. This can be either the ten-question short form, or the thirty-question long form. Both are full of pitfalls for the unsophisticated. Be aware that a careless phrase or an incomplete answer can later be used against the taxpayer. Like the rest of a residency audit, the questionnaires are intrusive and the State is looking at the taxpayer=s personal life in detail.
  • The State is also looking closely at a nonresident=s allocation of income, especially if there is a significant amount not allocated to New York. The detailed allocation questionnaire is designed to find out as much information as possible. The new allocation guidelines, issued in March, 2009, can offer assistance regarding the current interpretations by the State.

SALES TAX: The State is pursuing sales tax matters vigorously as well. In addition, the potential problems for the taxpayer have increased:

  • The State now routinely refers individuals for income tax audits, based on under-reported income arising from a sales tax audit. A seemingly minor sales tax assessment can quickly become a major financial headache, as NYS income tax, interest and penalties are asserted; and there may also be IRS liabilities based on the additional income.
  • A sales tax matter may become more than a question of monies owed. It is not uncommon for a sales tax audit to be referred to the State=s expanded Special Investigation Unit program for a look at possible criminal consequences.

CONCLUSION: Thus, your clients may be coming to you with more NYS problems than ever before. Be prepared for numerous audits and persistent collection action, while the State is facing difficult economic conditions.