• NY is cracking down on telecommuter tax audits – but is the state targeting the wrong individuals?

New York has always been a notorious stickler for tax collecting. Whereas the state typically targets high net worth individuals (AGI over $1 million), the pandemic has brought a new audit suspect into focus: telecommuters.

Since January, nearly 150,000 taxpayers have received letters from the New York Tax and Finance Department, with audits being sent only weeks after the May 17 filing deadline. Telecommuting taxpayers with annual income within the $100K to $300K range are the main targets in NY’s new effort to boost state funds.

Why Telecommuters?

NY is directing its efforts towards telecommuters now more than ever in an “unprecedented effort to recoup lost tax dollars” post-COVID-19.

The main catalyst can be linked back to NYS’ convenience rule for telecommuters. Wherever possible, New York will tax nonresident income if the taxpayer is performing work within the state. It gets trickier, however, when it comes to telecommuters who choose to work remotely out of state for “convenience” rather than necessity.

Taxpayers who indicated part-year residence in NYS or allocated less income to NYS on their 2020 tax returns than in prior years are on the state’s docket for audit.

Is Nonresident Taxation Legal?

The federal government allows states to tax nonresident income so long as there’s a valid nexus to substantiate the taxes levied.

However, work-from-home employees are challenging their NYS notices, claiming that the state does not hold the authority to tax someone who’s outside state lines. “Besides being unconstitutional, New York’s ‘convenience of the employer’ doctrine is self-destructive in the post-pandemic world. That doctrine leads to irrational tax overreach,” said Edward A. Zelinsky who filed a petition against the state for his NYS nonresident taxes.

What To Do With a Tax Audit Letter?

The audit letters being sent include a questionnaire for taxpayers to complete to prove their out-of-state residence and reasons for telecommuting. Those who have received letters from their taxing state or the IRS are encouraged to speak with their tax advisors.

DSJCPA is here to help you navigate taxes, audits, and more. Call our office at 516-541-6549 and visit our website for more information and to view a full list of our services.

Devin McQuillan
Associate, Creative Solutions

516-541-6549 | Email

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