New York Increases Focus On Remote-Work Tax Audits

As part of an unprecedented effort to recoup lost income-tax revenue, New York tax authorities are targeting individuals earning as little as $100,000 a year who claim to have left the state during the pandemic. Since the end of the filing season, thousands of notices from the New York Tax and Finance Department have landed in taxpayers’ mailboxes. Normally, it would take $1 million a year in income to trigger heightened scrutiny, but many people who are earning far less are receiving letters asking them to verify residency status and personal income allocation to determine whether they owe more to the state than claimed on their 2020 earnings. According to the state agency, their tax authorities have sent out more than 149,000 audit notices. This also includes computerized letters, or desk audits.

While New York is known to be an aggressive tax collector due to its history of relying on field audits of high-net-worth individuals, its latest enforcement efforts are highly unusual. This is due to New York tax authorities sending notices to clients with salaries between $100,000 and $300,000 a year within weeks of filing their state returns. The triggering events for such audits appear to be if a taxpayer indicated that they only lived in the state part of the year or allocated less income to New York than prior years.

Tax Enforcer. New York taxes the income of nonresidents if they work or perform services inside the state. This includes wages paid to a commuter who worked from home out of necessity during the pandemic. Some commuters, like those in neighboring New Jersey, will receive a credit on their New Jersey state income tax to avoid double taxation. Some have challenged that assertion, arguing that New York doesn’t have a right to tax income earned outside its borders.

Desk Audits. Tax experts say the pandemic has only accelerated an existing enforcement priority for the tax department over the last several months. Across the country, Americans fled dense major cities like New York during the height of the pandemic either to second homes or to temporarily live with family, while some left altogether to the suburbs in search of more space. Desk audits are computer-generated queries that are sent automatically to individual filers when the system picks up an anomaly in a tax return from prior years. A field audit consists of an individual auditor being assigned to deeply vet a taxpayer’s whereabouts for an entire tax year. In desk audits, taxpayers are being asked to fill out a non-resident questionnaire collecting preliminary information like when the individual last filed a state tax return, when they became a non-resident, and how many days they worked in New York.

$10,000 tax bill. Many have been surprised by these unexpected tax bills. Taxpayers have been receiving a $10,000 tax bill with their desk audit notice. This is because some believe that they can allocate a smaller percentage of income to New York compared to the previous year. Many taxpayers who are unable to prove their whereabouts are forced to pay state income tax even if they are a non-resident.

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