Rosen adds that the burden is typically placed on the taxpayer to prove that the state taxes are not owed.
Meanwhile, beware residency laws that are different in each state. Also, double taxation-taxation by two different states on the same money-can easily occur.
In fact, Sanford J. Weinberg, a Stamford, Conn., tax attorney, says that if the New York tax decision holds, the Barkers will likely wind up getting taxed on their unearned income-such as dividends, capital gains and interest-by both New York and Connecticut!
Luckily, however, Connecticut gives you 90 days after a tax verdict in another state to seek a credit on Connecticut income taxes already paid-even after its statute of limitations expires.
New York rules, Weinberg notes, are not as liberal. It's critical, Weinberg says, that clients with multiple homes monitor the number of days spent in New York for that state's income tax purposes. "That can be painstaking," he says. One CEO client who maintains residences both in New York and New Jersey, he says, goes so far as to cross the George Washington Bridge from New York and New Jersey at 12:01 a.m. the day before he'd be deemed a New York resident. This way his E-ZPass statement clearly documents non-residency.
Financial advisors too often suggest that clients document residency in a particular state by obtaining that state's driver's license and voter registration. However, that's likely not enough for a comprehensive audit.
Good records might include a report summary of frequent-flier accounts; credit card receipts documenting the trip between homes; or phone records. If a client is sharing a private jet, formal logs may prove acceptable.
Clients who fail to hang on to such records could have a big problem. That's because companies like airlines typically keep records for only 18 months, Rosen says. And New York state tax audits could begin at least four years after a client has filed a tax return.
Does your client have a residence but no income in that state? Even so, he or she should permanently keep frequent-flier and credit card records in case the state has questions, he suggests.
Also, once a state determines that a client is a permanent resident and owes that state income taxes, be prepared for that state to go after estate taxes when the client dies!