State tax officials use AI to go after wealthy payers

A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.

Even as the IRS makes headlines for cracking down on the wealthy, state tax collectors have become even more aggressive with audits of high earners, according to tax attorneys 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 declined by 5% to under 200 due to tight budgets.

So how is New York auditing more people with fewer auditors? Artificial Intelligence.

“States are getting very sophisticated using AI to determine the best audit candidates,” said Mark Klein, partner and chairman emeritus at Hodgson Russ LLP. “And guess what? 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.”

Klein said the state is sending out hundreds of thousands of AI-generated letters looking for revenue.

“It’s like a fishing expedition,” he said.

Most of the letters and calls focused on two main areas: a change in tax residency 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 earners who moved, and took their tax dollars with them, are now being challenged by states who claim the moves weren’t permanent or legitimate.    

Klein said state tax auditors and AI programs are examining cellphone records to see where the taxpayers spent most of their time and lived most of their lives.

“New York is being very aggressive,” he said.

On remote work, states like New York that have so-called “convenience rules” argue that if you are employed by a New York company, from their New York office, you owe New York taxes — even if you live and work in Colorado.

Many of the wealthy in New York City who moved kept their apartments with most of their belongings. State tax authorities are claiming that since they didn’t move with all of their household items, for tax purposes they didn’t actually move.

“The state says, ‘Well, you didn’t really move since all your TV and all your stuff is still in New York,'” Klein said. “They don’t understand, the wealthy can buy more stuff for the Florida home. They can buy another TV.”

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