Moving to South Carolina? What You Need to Know About Residency Audits

It’s no secret that many states are struggling with their budgets. Notably Connecticut, New York, New Jersey, Illinois, and California are all working through major revenue and expenditure issues, most of which are tied to public pension obligations. State tax officials in these states are working hard to collect as much revenue as possible to limit the shortfalls. One strategy these officials are using that you may not have heard of is called a “residency audit.” Essentially, these states are tracking down former residents who are now filing taxes in a new state and auditing them in an attempt to collect more tax revenue. Unfortunately for individuals, these states are placing the burden of proof on the taxpayer and it is often difficult for taxpayers to prove they have severed all ties to their former state.

Who is at risk for a residency audit?

While there is no one set of conditions that “triggers” a residency audit, there are several factors that can increase your risk of an audit. The states that are most commonly performing these audits are: California, Connecticut, New York, New Jersey, Pennsylvania, North Carolina, Idaho, and Minnesota. If you are moving out of one of these states, you are at a higher risk for an audit. These states typically target high income or high net worth tax payers. Remember, this is an effort to raise revenue- it’s probably not worth the auditors’ time to go after a lower income or lower net worth tax payer. Finally- you are at a higher risk for an audit if you are splitting time between your former state and your current state. The old adage of spending “six months and a day” outside your former state doesn’t necessarily apply anymore- states are looking for a clean break.

Moving to South Carolina

I’m not moving from one of the states listed above. What are other states doing?

Other states are aware of the aggressive tactics some states are using but don’t yet have a formal system established for auditing ex-residents. Attorney Thomas Frascella, J.D. writes: “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 a benefit to be gained by implementing an audit policy around the issue.” Regardless of the state you’re moving from, you’ll want to make sure to clearly establish residency in your new state to be ready for a residency audit should one occur.

Residency Audit Tax

What are the steps I should take to establish residency?

This is a difficult question to answer as most states do not have a concrete list of qualifiers to determine residency. California is one of the most difficult states when it comes to predicting whether or not the auditors will determine that residency has been established elsewhere. The state of California allows their auditors to consider “facts and circumstances” leaving quite a lot of room for interpretation.

That being said, there are many common steps that taxpayers can take to help establish residency and increase the chances of successfully passing the audit and not paying taxes in their former state:

1.Acquire a new residence in your new state.

Most auditors prefer to see you living in a home that you own in your new state, but renting a home, apartment, or condo will usually work as well. You may need to show that the home is furnished. An empty apartment is not likely to work.

2.Sell your old home as soon as possible.

Keep a record of when you purchased your new home and when you sold you old home. Auditors will look for detailed records and documentation of when the move took place

3. Declare your residency with your new county.

The process for this may vary by state or county. Most counties will have a form for this.

4. Obtain a new driver’s license and register to vote in your new state.

5. Register your vehicles in your new state.

6. Claim or file a homestead exemption in your new state.

This step has the added benefits of lowering your property taxes!

7. Pay state income taxes (if applicable) in your new state.

8. Change your address with your bank and any other financial institutions with whom you associate to your new address. Have all statements mailed to your new address. You may even consider getting a safety deposit box at a bank in your new state.

9. Make sure your federal tax return goes to your new address.

10. Move your possessions to your new home. States will often want to see that you have moved your “near and dear” items to your new state of residence.

Auditors from different states will be looking at different factors here, but in general they are looking to see that you have moved items of sentimental value, family heirlooms, any valuable collectibles, art work, and prized possessions.

11. If you have minor children, make sure they are enrolled in school in your new state. A spouse or minor child continuing to live in your former state will not support your case that you have moved.

12. Make sure your will and other legal documents are written in accordance with the state law in your new state. Although perhaps an extreme step- you may even consider buying a burial plot in your new state. Auditors are looking at all the details here.

13. Join local clubs and organizations. Make local charitable contributions.

Auditors may look for membership in local churches or synagogues, charitable organizations, country clubs, and the like. They are trying to establish whether or not the ex-resident has formed new social ties. Certain states will even interview witnesses who know you. They are trying to make sure that you have truly “moved on” from your previous state.

14. Make sure you are spending the majority of your time in your new state. Keep a record of where you are spending your time and collect and maintain evidence that supports your records.

Some experts recommend noting whether or not you were present in your old state each day in a log or on a calendar. Certain auditors may even request evidence to support your claim that you were absent from the state on the days you say you were. Receipts or other records showing dates and locations will help support your case.

15. Make sure any active business involvement you have is located in your new state, if possible. If you change jobs, make sure to keep a record of when you left your old job and when you started your new job.

16. Get a new dentist, doctor, barber or hairdresser, chiropractor. Ensure you have moved all dental and medical records to your new dentist and doctor.

What should I do if I get a letter from the tax agency informing me of a pending residency audit?

Most experts do not recommend just waiving the white flag and conceding in the event of an audit. However, you will want to make sure that you have adequate legal representation. Remember- the stakes are high here; your former state is unlikely to pursue the audit unless they are potentially receiving a large check for your taxes and you certainly don’t want to pay those taxes. A good tax attorney will cost anywhere between $200 and $750 per hour. Attorneys who are highly experienced or who work in larger cities may charge closer to $1000 per hour or more.

The auditor requested information from me and I provided that information. What can I expect now?

Every situation is different. If the information supplied was adequate to determine residency out of state, the auditor may close the case and move on. It is also possible that the evidence provided leads to more questions and more information will need to be provided. This will be looked at on a case by case basis.

How long will the audit take?

 Again, the process can vary by state and is different for each individual. California and New York’s audits tend to be the longest and most intrusive. As such, many recipients of audits in these states often end up negotiating a settlement to limit the length and stress of the audit process.

Can a residency audit affect my estate taxes?

Potentially. If the state you moved from has an estate tax and the results of the audit find that you are still maintaining residency in your old state, it is possible you could be on the hook for estate taxes in your old state.

State Income Tax Letter

A residency audit is an intrusive process that is being pursued aggressively by certain states. All signs point to more states adopting these strategies in the future as their budgets become further strained and more residents seek residency in lower tax states. Following the steps above will help you establish residency in your new state, but this should not be considered a comprehensive list. For high income earners or taxpayers with high net worth considering moving to another state, consult a CPA or tax attorney familiar with the tax law and the audit process in your state as you make the transition to your new home. If you receive a letter informing you of a pending residency audit, be sure to contact a tax attorney equipped to navigate the audit process in your former state.

Moving to a new state is both exciting and challenging. It is also a decision that carries potentially large financial implications. We always recommend speaking with a CERTIFIED FINANCIAL PLANNER™ prior to making this decision to give you a comprehensive look at your current and future financial standing.