An individual who lives outside of New York and maintains a home, apartment, or room in New York that is usable all year may be surprised to learn that under New York tax law, the individual may be classified as a tax resident for personal income tax purposes.
Generally, a nonresident of New York is taxed only on income derived from New York sources. Conversely, a New York resident is taxed on virtually all of his federal adjusted gross income, regardless of source. For example, a professional who resides in New Jersey and rents a small apartment in Manhattan for occasional use may often be selected by the New York State Department of Taxation and Finance (DTF) for a personal income tax examination. If the individual is determined to be taxable as a New York resident, the result can be costly.
Where an individual has a place of abode in New York, a personal income tax audit will generally include two separate inquiries—domicile and statutory residency—to determine whether the individual has met the criteria to be taxed as a New York resident. This article will focus on examinations where statutory residency is the crux of the audit. For a more detailed overview of domicile, please see the April 2015 CPA Journal column, “Who Is a New York Resident?”
Statutory residency hinges on the individual spending in excess of 183 days during a given tax year within the state. In general, any part of a day counts as a full day, with certain exceptions. In a personal income tax audit, the taxpayer will have the burden of proof to demonstrate by clear and convincing evidence that she was not in New York for more than 183 days. The DTF will typically request documentation such as credit card and bank statements, EZ Pass toll invoices, personal calendars, diaries, and travel itineraries to enable the auditor to quantify the taxpayer’s number of days spent within New York, as well as open days for which the taxpayer’s location cannot be determined. If the DTF’s calendars reflect that the individual has spent in excess of 183 days in New York for any of the years under examination, the individual will then be required to produce evidence to effectively reduce the number of New York days, including open days, below the threshold. In this regard, it may be useful to review the availability of specific electronic and digital records that might attest to an individual’s daily whereabouts. In this context, an individual may have access to different sources of electronic records that show her location. Below are examples of such records that have been successfully introduced during audits to demonstrate daily presence within or without New York.
Employee Access Records
Most businesses and governmental agencies require employees to utilize a device such as pass card to gain access to their offices every time they enter the premises. Use of such a card is recorded in a database, which usually contains the date and time an individual entered the premises on any day. Employee access records can demonstrate the times a person was present at the place of employment, and the results are largely irrefutable, since the information is unique to the individual. Where the employee works from multiple locations, perhaps inside and outside New York, the combined building access records can help in ascertaining a person’s whereabouts throughout a given day.
The potential value of employee access records in a statutory residence audit is significant. Because there may be no mandated retention policies for these records and the employer or building management may purge them at any time, however, a taxpayer at risk of being audited should inquire with the employer and the management company regarding the present and future availability of access records. If necessary, the individual should request and retain copies for future use.
Employer Computer Network Access Records
Whenever an individual gains access to a computer network, multiple sources of information may be established, including date and time of login and logoff, duration of access, the device used (e.g., desktop computer, cellphone), and possibly the location from which the network was accessed. If the network is configured to identify and segregate this information, the individual may have another means to prove his whereabouts on a certain day.
Since network access information establishes a unique, indelible “digital fingerprint” for the user, this data may be used to document days where the individual’s location has not yet been established. For example, a person under audit may regularly work at an office in Manhattan, but may also work remotely from home in New Jersey. Routine records may show nothing for these days, or they may lack sufficient details to prove the person did not enter New York when she worked remotely. (Note that working remotely could trigger the “convenience vs. necessity” rules in New York, which are beyond the scope of this article.) Network access records can be utilized to confirm that the individual actually worked from a location outside New York.
Network access data records are potentially useful in an audit, but there are potential problems. First, this information can only be accessed through a business’s IT department, and retention policies will again be relevant. Second, as network design and configuration vary, it is crucial to ascertain whether these records contain enough verifiable information to use as evidence. Some network access records may only confirm the date and time of remote access without providing the location of a remote login. Third, the data must be credible enough to withstand audit scrutiny. For example, if the person logged in at 8:00 a.m., logged out at 9:18 a.m., and then logged in again at 3:07 p.m., while other days show she was connected to the network for the duration of a normal workday, an auditor reviewing these records may question such minimal or sporadic access.
GPS Tracking Applications for Cellphones
The Global Positioning System (GPS) uses satellites to determine the location of a person with great accuracy. Several cellphone applications utilize GPS technology to determine location whenever the person’s cellphone is connected to the Internet. One of the more sophisticated programs, called Monaeo (https://monaeo.com/), was developed specifically for individuals at risk for residency examinations. This program establishes an almost continuous data stream that records the user’s location to an accuracy of about 25 feet using GPS. Generally, all that is required is for the cellphone to be switched on and have the ability to automatically connect to the Internet. All information regarding the user’s whereabouts is recorded and archived, as well as encrypted, making it immune from manipulation. A user can also set warnings if the projected New York day count is approaching the 183-day threshold; if so, the individual can proactively avoid entering New York to safeguard his non-resident status.
The DTF routinely requests cell phone records directly from telecommunications carriers. Generally, every voice and data transmission for a specific cellphone number is documented chronologically. Depending on the amount of activity, a full year of cellphone documentation can exceed several thousand pages in length; however, only voice records should be utilized in a residency examination. The DTF will generally utilize these records to refute days where the taxpayer has contended that she was not present in New York on a given day, but may also employ them to assist in establishing location on undocumented days.
Virtually every cellphone call, outgoing or incoming, requires a connection to a cell tower or antenna. Furthermore, depending on factors such as network traffic, population density, weather conditions, and whether the caller is stationary or in motion, multiple cellular antennae may be utilized to maintain and complete the call. Cellular records supplied by carriers will generally include details for every call made for each cellphone number on an account, including connection date, time, duration of the call, and most importantly, the location of the cellular antennae used to complete the transmission. The DTF will frequently utilize the latter to determine the caller’s whereabouts.
The analysis of cellphone records is a highly technical subject that is beyond the scope of this article. A detailed explanation of this topic, including methods for analyzing cellular records, general technology considerations, and suggestions for applying this knowledge during the course of a residency examination will be presented in an upcoming article.
Utilize Available Data
Residency determinations can be extremely complex; navigating through a residency examination can be confusing and time-consuming, especially when day counting and construction of yearly calendars are required. Electronic data information may provide CPAs with alternative ammunition when defending against audits. The DTF is already using these records, and CPAs should be cognizant of this and avoid potential traps.