- State tax officials are increasingly using AI for audits of high-income individuals.
- New York saw a 56% increase in audits in 2022 despite a 5% decrease in auditors.
- AI assists in identifying prime audit candidates, focusing on high earners.
- Audits concentrate on tax residency changes and remote work arrangements.
- Scrutiny includes analyzing cellphone records to determine primary residency.
- “Convenience rules” are used to assert tax liability based on employment location.
- Challenges arise for wealthy individuals relocating to low-tax states.
Main AI News:
State taxation authorities are harnessing the power of artificial intelligence to target affluent taxpayers. While the IRS garners attention for its crackdown on the wealthy, state tax collectors are intensifying their scrutiny of high-income individuals, as indicated by tax attorneys and accountants.
In New York, audit numbers surged to 771,000 in 2022, a 56% increase from the preceding year, according to the state Department of Taxation and Finance. Concurrently, the count of auditors decreased by 5% to under 200 due to budget constraints. How is New York managing to audit more individuals with fewer auditors? The answer lies in Artificial Intelligence.
“States are becoming highly adept at utilizing AI to identify prime candidates for audits,” remarked Mark Klein, partner and chairman emeritus at Hodgson Russ LLP. “And unsurprisingly, the focus isn’t on individuals earning $10,000 annually; it’s on those earning $10 million.”
Klein revealed that the state is dispatching hundreds of thousands of AI-generated notifications in pursuit of revenue. He likened the process to a fishing expedition. The majority of these notifications and inquiries revolve around two primary areas: changes in tax residency and remote work arrangements.
During the COVID-19 pandemic, many affluent individuals migrated from high-tax states like California, New York, New Jersey, and Connecticut to states with lower tax burdens, such as Florida or Texas. Now, states are contesting the permanency and legitimacy of these moves, particularly for high earners who relocated while maintaining substantial ties to their former residences.
State tax auditors, aided by AI algorithms, are scrutinizing cellphone records to ascertain where taxpayers predominantly resided and spent their time. According to Klein, New York is exhibiting particularly assertive behavior in this regard.
Regarding remote work, states like New York are invoking “convenience rules” to argue that individuals employed by New York-based companies, even if working remotely from other states like Colorado, are still liable for New York taxes. Moreover, many wealthy individuals who relocated from New York City retained their apartments and belongings, leading state tax authorities to challenge the legitimacy of their moves.
“The state contends that you didn’t genuinely relocate since all your possessions are still in New York,” Klein explained. “They fail to grasp that the affluent can furnish their Florida residences with additional items; they can buy another TV.”
Conclusion:
The trend of state tax authorities employing AI for audits, particularly targeting high-income taxpayers, underscores a growing sophistication in tax enforcement strategies. This shift suggests an evolving landscape where tax compliance for affluent individuals faces heightened scrutiny and challenges, potentially influencing their relocation decisions and financial planning strategies. Businesses catering to tax planning and residency services may witness increased demand amid this regulatory landscape.
