State tax collectors are ramping up their efforts to audit high earners, with New York reporting a significant increase in audits despite a decrease in the number of auditors. In 2022, New York’s tax department conducted 771,000 audits, which was a 56% increase from the previous year. Surprisingly, the number of auditors in New York actually declined by 5% to under 200 due to budget constraints. This raises the question of how the state is able to audit more individuals with fewer auditors, and the answer lies in the use of Artificial Intelligence (AI).
According to tax attorneys and accountants, states like New York are leveraging AI technology to identify the best candidates for audits. Mark Klein, partner and chairman emeritus at Hodgson Russ LLP, highlighted the sophistication of state tax departments in using AI to target high-income individuals. He emphasized that when states are seeking revenue, they are more likely to target individuals earning millions rather than those making a modest income. AI algorithms are being utilized to send out hundreds of thousands of targeted letters aimed at identifying potential tax liabilities, turning the audit process into a widespread “fishing expedition.”
The surge in audits is largely focused on two main areas: changes in tax residency and remote work arrangements. During the Covid-19 pandemic, many affluent individuals relocated from high-tax states like New York, California, New Jersey, and Connecticut to tax-friendly states such as Florida and Texas. However, states are now challenging the legitimacy of these relocations, claiming that they were not permanent and genuine moves. State tax auditors, aided by AI programs, are scrutinizing cellphone records to determine where taxpayers spent the majority of their time and established their primary residences.
States like New York are invoking “convenience rules” to assert that individuals who work remotely for a New York-based company from another state still owe New York taxes. This has led to disputes with wealthy individuals who have retained properties and belongings in New York while living and working elsewhere. State tax authorities argue that since individuals did not move all of their possessions, their relocation is not considered valid for tax purposes. The complexity of determining tax residency and the implications of remote work have sparked controversies and legal challenges among high earners.
The use of AI by state tax collectors to target high-income individuals signals a new era of increased scrutiny and enforcement. As audits become more targeted and sophisticated, taxpayers, especially the wealthy, need to ensure compliance with tax laws and regulations to avoid potential conflicts with tax authorities. The landscape of tax enforcement is evolving, and individuals must stay informed and proactive in managing their tax obligations to navigate these changing dynamics effectively.