Oct 1, 2011 12:00 PM

The answer to this question may not be so simple, as states raise revenue through increased audit enforcement of residency issues

By Timothy P. Noonan

State governments are, more than ever, struggling to meet budget deficits. But state legislators often find that raising taxes and cutting programs aren't the best ways to get re-elected. Instead, many states have found a new way to plug holes in the budget: increasing revenue through heightened audit enforcement. And what better way to increase revenue than to go after high-net-worth individuals (those “corporate jet owners,” as our President likes to call them) who claim they don't even live in the state? Indeed, those folks don't even vote in state elections! So, increasingly, state governments are turning to their own state tax departments and empowering them to mine their database of high-net-worth individuals and look for residency targets.

Don't worry, it gets even better. Not only do taxpayers have to deal with aggressive tax departments and hungry tax auditors, but also taxpayers potentially have to deal with 51 different sets of rules. That's because each jurisdiction determines residency differently. What makes you a resident of New York might not necessarily also make you a nonresident of California and vice versa. Moreover, because jurisdictions have disparate tests for residency, it's quite possible for taxpayers to qualify as residents of multiple states in the same tax year, facing double — or possibly even triple — taxation on the same income. While this result may create a boom in business for tax practitioners, for everyone else it creates a terrible headache and incredible concern. To properly advise clients, it's important to know the rules in this context. Indeed, of all the different tax issues out there facing high-net-worth individuals and the tax professionals who represent them, residency really isn't all that complicated. Still, it's more complex than people think, and taxpayers and their advisors need to have a full understanding of the test (or tests) that apply in various jurisdictions.

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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

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