Thinking About Changing Your State Residency? Beware the Residency Audit

Beware the state residency auditYour state of residency determines where you pay state personal income tax. Most states define a resident either as someone who is domiciled in the state or as someone who, although not domiciled in the state, maintains a permanent place of abode and spends in aggregate more than 183 days in the state. Individuals who meet the latter test of spending more than 183 days in the state are commonly referred to as statutory residents.

Changing statutory residency status is more easily accomplished than changing domicile. Domicile refers to the place where an individual intends to create a permanent home. Once a domicile is established, it does not change until the individual moves, with the intention of making the new location his or her permanent home.

At one time, it was relatively easy to establish a new domicile and to make the new location your permanent residence. Changing your domicile usually required a minimum amount of proof such as a new voter registration card, a driver’s license from the new state, and a new forwarding mailing address.

During the Great Recession, states became much more suspicious of changes in taxpayer residency status. They began to realize that many taxpayers still maintained significant ties to the state in which they were formerly domiciled, despite a change in the location of their residences. Thus, states began to conclude that the change in location was motivated more by a desire to reduce state tax liability than to make a permanent move. This resulted in a significant increase in residency audits.

Residency audits became a means of holding onto taxpayer dollars during a period of state budget deficits and political demand to hold the line on taxes. States such as Minnesota, New York, and Pennsylvania have begun to implement these audits as part of their return review procedures and have taken taxpayers to task when they do not believe the facts and circumstances support a conclusion that the taxpayers intend to reside in their new location permanently.

Other states and localities are looking at this issue on a more informal basis, but will likely adopt a more formal approach as it becomes clearer that there is benefit to be gained by implementing an audit policy around the issue.

Residency audits focus on the facts and circumstances of your move from one location to another to determine whether you have met the burden of establishing your intent to make the new location your permanent home.

If you are contacted by a state or locality for the purpose of conducting a residency audit, there are several things you can do to make sure you are prepared for and successfully defend the audit.

  • Be ready to demonstrate your new location is permanent by showing that it is where you spend the majority of your time and that your prized possessions are there with you.
  • Limit the time you are actively engaged in a business enterprise located in your old domicile. Otherwise, you risk the state taking the position that your domicile has not truly changed.
  • Resolve any issues related to “trailing” family members. The state will take an unfavorable view of family members such as a spouse or minor children left behind in your former state of domicile for a prolonged period of time.
  • Sell your residence in your prior state as quickly as possible after your relocation.

Thomas M. Frascella can be reached at Email or 215.441.4600.

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