One reason tax audits by state agencies will likely go up in 2019

As tax filing season ends, taxpayers throughout the country begin to realize the reality of tax audits. Tax experts predict tax audits by state agencies to go up this year. The main reason: the new tax law.

How would the new tax law lead to increased state tax audits?

The Tax Cuts and Jobs Act (TCJA) led to a cap on the state and local tax (SALT) deductions on federal tax returns. Taxpayers who file a return as a married couple can now only claim up to $10,000 while single filers are capped at $5,000.

In high tax states, like California and New York, this cap has led to serious frustration. Some taxpayers have even taken to changing their state of residence in an attempt to reduce their tax obligation.

How would this reduce their tax obligation?

If the New York or California resident can successfully relocate to another, lower tax state the taxpayer will likely have a lower tax obligation. The applicable state tax will decrease, potentially to a rate that qualifies for a full federal deduction instead of additional tax obligations.

Why would this trigger more audits?

Because high tax states want to get their revenue from these taxpayers. If residents are not careful, they could find themselves subject to tax in two states.

How would this happen?

State agencies have specific requirements to sign off on relocation. Unfortunately for the taxpayer, this decision is often subjective. New York courts, for example, will review the size of the home in state the taxpayer claims as their new state of residence to the size of the home in New York. The courts will review the number of days spent in New York and any business ties. Courts will dig for a connection to rebuke the claimed relocation and still attempt to collect taxes.

Although relocation is a legal way to reduce tax obligations, taxpayers are wise to do so carefully. It is often wise to seek the counsel of an attorney experienced in these matters to discuss your plan and mitigate the risk of any surprises.

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