State tax collectors are ramping up their efforts to audit high earners, even as the IRS focuses on cracking down on the wealthy. In New York, for example, the Department of Taxation and Finance reported a significant increase in audits in 2022 compared to the previous year. But what’s surprising is that this increase is happening despite a decrease in the number of auditors in the state. The secret behind this unexpected trend? Artificial Intelligence.
According to tax attorneys and accountants, states like New York are leveraging AI technologies to identify potential audit candidates more effectively. Mark Klein, partner at Hodgson Russ LLP, mentioned that the use of AI has allowed state tax departments to target individuals with higher incomes. By sending out AI-generated letters in large numbers, states are conducting a sort of “fishing expedition” to uncover potential tax revenue.
The audits conducted by state tax authorities primarily focus on two main areas: changes in tax residency and remote work arrangements. With the rise of remote work during the Covid-19 pandemic, many wealthy individuals relocated from high-tax states to low-tax states. However, states like New York are questioning the legitimacy of these moves, especially if they believe the relocations were not permanent.
State tax auditors are going to great lengths to challenge the tax residency claims of high earners. By examining cellphone records and other data, they aim to prove that individuals still maintained significant ties to high-tax states like New York. Additionally, states with “convenience rules” are arguing that even remote workers who are based outside the state still owe taxes if their employer is located in the high-tax jurisdiction.
One of the strategies employed by state tax authorities is to claim that individuals who did not move all of their belongings out of state did not actually change their tax residency. This argument has put many wealthy individuals, especially those who split their time between multiple residences, in a tough spot. The states’ position is that if most of their belongings remain in the high-tax state, the relocation is not considered valid for tax purposes.
As states like New York become more aggressive in their tax audit practices, high earners are finding themselves under increased scrutiny. The use of AI technology has allowed tax authorities to cast a wider net and target individuals who may have previously flown under the radar. With residency and remote work issues at the forefront of these audits, it’s clear that the landscape of state tax compliance is evolving rapidly. Wealthy individuals must be prepared to navigate these challenges and ensure they are in compliance with the ever-changing tax laws.
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