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State tax collectors are ramping up their efforts in auditing high earners, with New York experiencing a significant increase in audits. This surge in audits is accompanied by a decrease in the number of auditors due to budget constraints. However, the state is managing to audit more individuals with fewer auditors by harnessing the power of Artificial Intelligence (AI). According to experts in the field, states are becoming increasingly sophisticated in using AI to identify potential audit candidates, with a focus on targeting individuals with higher incomes.

Targeting High-Income Individuals

The shift towards AI-driven audits is motivated by the goal of maximizing revenue for the state. Rather than focusing on individuals with lower incomes, state tax agencies are setting their sights on high earners, particularly those making millions of dollars. Through the use of AI-generated letters, states are casting a wide net in search of additional revenue. This approach has been likened to a fishing expedition, with tax authorities leveraging technology to identify potential tax liabilities among wealthy individuals.

Challenges Around Tax Residency and Remote Work

Two key areas of focus for state tax auditors and AI programs are tax residency changes and remote work arrangements. As a result of the Covid-19 pandemic, many affluent individuals shifted their residency from high-tax states to low-tax states. However, states are now challenging the legitimacy of these moves, claiming that individuals did not establish permanent residency in their new locations. By analyzing cellphone records and other data, tax authorities are scrutinizing the lifestyle patterns of taxpayers to determine their primary place of residence.

Moreover, states with “convenience rules” are asserting their right to tax individuals who work remotely for New York-based companies, even if they are physically located in a different state. This approach has raised concerns among high-income individuals who have relocated but maintained ties to their original state. State tax agencies argue that the presence of belongings and assets in the previous state indicates a lack of genuine relocation, thereby justifying the imposition of taxes.

As state tax agencies increasingly turn to AI technologies to enhance their auditing capabilities, high-income individuals face heightened scrutiny and challenges in navigating complex tax regulations. The use of AI-driven audits is reshaping the landscape of tax enforcement, posing significant implications for taxpayers, particularly those with substantial incomes. In the evolving tax environment, individuals must be vigilant in understanding their tax obligations and preparing for potential audits to ensure compliance with state regulations.

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