Recent reports indicate that state tax collectors are ramping up their efforts to audit high earners. In New York, for example, there was a significant increase in audits in 2022, with the state Department of Taxation and Finance reporting 771,000 audits, a 56% increase from the previous year. Surprisingly, despite a 5% decline in the number of auditors, New York managed to audit more individuals with the help of Artificial Intelligence (AI).

According to experts like Mark Klein from Hodgson Russ LLP, states are leveraging AI technology to identify audit targets effectively. By utilizing AI algorithms, tax authorities can pinpoint individuals who are likely to generate substantial through audits. This advanced technology allows states to cast a wide net and target high earners, rather than individuals with lower incomes.

The surge in audits is primarily centered around two main areas: changes in tax residency and work. During the Covid-19 pandemic, many wealthy individuals relocated from high-tax states to low-tax states. However, states like New York are now questioning the permanence and legitimacy of these moves, claiming that individuals did not truly establish residency in their new locations. By scrutinizing cellphone records and other data, state tax auditors aim to determine where individuals spent the majority of their time and whether they maintained ties to their original state.

One of the contentious issues arising from is the application of “convenience rules” by states like New York. These rules stipulate that if an individual is employed by a New York-based company, they are liable to pay New York taxes regardless of their physical location. This has led to disputes with individuals who work remotely from states with lower tax rates, such as Colorado, while still being employed by New York companies. State tax authorities argue that individuals have not truly relocated if they retain significant assets or belongings in New York, even if they establish a new residence elsewhere.

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For many wealthy individuals, navigating these complex tax regulations poses a significant challenge. State tax audits backed by AI technology are increasingly targeting high earners who have made significant financial moves during the pandemic. The scrutiny placed on residency changes and remote work arrangements underscores the intricacies of tax compliance for affluent individuals. As states become more aggressive in their pursuit of tax revenue, the wealthy must carefully consider their financial decisions and ensure compliance with evolving tax laws.

The integration of AI in state tax audits represents a significant shift in how tax authorities identify audit targets. The increased focus on high earners, residency changes, and remote work arrangements highlights the need for individuals to engage proactively with tax and compliance. By staying informed and seeking professional advice, individuals can navigate the complexities of state tax audits and mitigate potential risks associated with AI-driven enforcement efforts.

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