The New Frontier in Tax Collection: States Unleash AI to Audit High Earners
As the government intensifies its efforts to catch wealthy taxpayers who evade taxes, state tax collectors are becoming even more vigilant in auditing high earners.
According to tax attorneys and accountants, there has been a significant rise in state-level audits, especially in New York.
In 2022, the number of audits in New York increased by 56% compared to the previous year despite a 5% decrease in the number of auditors. The secret behind this efficiency? AI.
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- States are using AI to aggressively audit high earners, focusing on changes in tax residency and remote work arrangements.
- Thanks to AI-driven strategies, New York saw a 56% increase in audits in 2022 despite a 5% decline in auditors.
- Wealthy individuals who moved during the pandemic or kept apartments in their original state face scrutiny over the legitimacy of their relocations for tax purposes.
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The New Frontier in Tax Collection: States Unleash AI to Audit High Earners
States are leveraging sophisticated AI algorithms to target individuals with high incomes, as these individuals are more likely to generate revenue.
As Mark Klein, partner and chairman emeritus at Hodgson Russ LLP, says, “When you’re looking for revenue, it’s not going to be the person making $10,000 a year. It’s going to be the person making $10 million.”
States are casting a wide net, sending hundreds of thousands of AI-generated letters in what Klein describes as a “fishing expedition.”
These letters and calls focus on two primary areas: changes in tax residency and remote work arrangements.
During the Covid pandemic, many wealthy individuals relocated from high-tax states like California, New York, New Jersey, and Connecticut to low-tax havens like Florida or Texas.
Now, states are challenging the legitimacy and permanence of these moves, seeking to reclaim the tax dollars that left with these high earners.
State tax auditors and AI programs scrutinize cellphone records to determine where taxpayers spent most of their time and lives.
Remote work has also been scrutinized, particularly in states with “convenience rules,” like New York.
These rules stipulate that if a New York company employs you and you work from their New York office, you owe New York taxes, even if you reside and work in another state.
This has led to disputes between states and taxpayers who have embraced remote work arrangements.
Another point of contention arises when wealthy individuals move but keep their apartments and belongings in their original state.
Tax authorities argue that failing to relocate with all household items indicates that, for tax purposes, the move was not genuine.
Klein illustrates this with an example: “The state says, ‘Well, you didn’t really move since all your TV and stuff is still in New York.’ They don’t understand that the wealthy can buy more stuff for Florida homes. They can buy another TV.”
Due to tight budgets and the need for revenue, AI is becoming an increasingly potent tool in tax audits.
High earners are subjected to intense scrutiny over their residency status and remote work arrangements.
As this trend continues, taxpayers must stay informed and prepared to defend their tax positions against AI-driven audits.
