The landscape of tax audits is shifting, with state tax collectors ramping up their efforts to target high earners. In New York alone, there were a staggering 771,000 audits in 2022, representing a significant 56% increase from the previous year. Surprisingly, this uptick in audits comes at a time when the number of auditors in New York has actually declined by 5%, with fewer than 200 auditors on staff due to budget constraints. The question then arises: how are states managing to audit more individuals with fewer resources? The answer lies in the utilization of Artificial Intelligence (AI) as a key tool in identifying potential audit candidates.
According to Mark Klein, a partner at Hodgson Russ LLP, states are leveraging AI technology to pinpoint individuals most likely to yield additional revenue through tax audits. The focus is predominantly on high-income earners, rather than those with lower incomes. By deploying AI algorithms, states are able to send out hundreds of thousands of automated letters to potential audit targets, creating what Klein describes as a “fishing expedition” for additional tax revenue. Cellphone records are being scrutinized to determine where taxpayers have been residing and spending a majority of their time, enabling auditors to challenge the legitimacy of individuals’ tax residency claims.
One of the key areas under scrutiny is the issue of remote work, particularly in the wake of the Covid-19 pandemic. States like New York are enforcing what are known as “convenience rules,” which stipulate that individuals employed by New York-based companies owe taxes to the state, regardless of where they physically work and reside. This has led to conflicts with high-income earners who relocated to states with more favorable tax environments during the pandemic. State tax authorities are arguing that the relocation was not permanent or legitimate, pointing to possessions left behind in New York as evidence that individuals did not fully move.
The aggressive stance taken by states like New York has significant implications for wealthy individuals, especially those who sought to establish residency in low-tax states like Florida or Texas. Despite maintaining properties and belongings in these states, individuals are finding themselves embroiled in tax disputes that question the legitimacy of their relocations. The notion that owning possessions in multiple locations can undermine claims of tax residency is a new challenge faced by high earners, as states become increasingly adept at leveraging technology and legal frameworks to maximize tax revenue.
The rise of state tax audits targeting high earners underscores the need for individuals to carefully navigate the complex landscape of tax regulations and ensure compliance to avoid potential legal challenges. As states employ advanced technologies like AI to identify audit targets, proactive tax planning and consultation with legal experts are essential for protecting one’s financial interests in an increasingly scrutinized tax environment.
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