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Even as the IRS makes headlines for cracking down on the wealthy, state tax collectors have become even more aggressive with audits of the highest earners, according to tax lawyers and accountants.
In New York, the tax department reported 771,000 audits in 2022 (the latest year available), up 56% from the previous year, according to the state Department of Taxation and Finance. At the same time, the number of auditors in New York decreased by 5% to less than 200 due to tight budgets.
So how can New York audit more people with fewer auditors? Artificial intelligence.
“States are becoming very sophisticated in using AI to determine the best candidates for audit,” said Mark Klein, partner and chairman emeritus of Hodgson Russ LLP. “And guess what? When you're looking for income, it's not going to be the person who makes $10,000 a year. It's going to be the person who makes $10 million.”
Klein said the state is sending out hundreds of thousands of AI-generated letters seeking revenue.
“It's like a fishing expedition,” he said.
The majority of letters and calls focused on two main areas: changing tax residence and remote work. During Covid, many of the wealthy moved from high-tax states like California, New York, New Jersey, and Connecticut to low-tax states like Florida or Texas.
High-income earners who moved and took their tax money with them are now being challenged by states that claim the moves were neither permanent nor legitimate.
Klein said state tax auditors and artificial intelligence programs are examining cell phone records to see where taxpayers spent most of their time and lived most of their lives.
“New York is being very aggressive,” he said.
Regarding remote work, states like New York, which have so-called “convenience rules,” argue that if you are employed by a New York company, from its New York office, you owe New York taxes, even if you live and works in Colorado.
Many of New York City's wealthy who moved away kept their apartments with most of their belongings. State tax authorities claim that since they did not move with all the household items, for tax purposes they did not actually move.
“The state says, 'Well, you didn't actually move since all your television and all your stuff is still in New York,'” Klein said. “They don't understand that rich people can buy more things for their house in Florida. They can buy another television.”
