I’ve received a lot of phone calls over the years from people wanting to leave California. They don’t want to deal with the taxes or the regulations. These individuals who reach out to me want to know about residency audits and whether they will face one when they leave the Golden State. Here is what you need to know about California residency audits.
A residency audit is when the state determines that you are a resident of the state and, as such, subject to the state’s income tax. The state of California has three classifications for an individual: you’re a resident, you’re a non-resident, or you’re a partial-year resident. According to the Franchise Tax Board (FTB), you are a California resident if you meet any of the following criteria: present in California for other than a temporary or transitory purpose; or domiciled in California, but located outside California for a temporary or transitory purpose.
A non-resident is any individual who is not a California resident, and a part-year resident is any individual who is a California resident for part of the year and a non-resident for part of the year (e.g., someone who lives in both California and Nevada). If you are moving to another state, it’s really important that you actually move to another state. For example, if you’re moving to Nevada, you need to move your family, your house, your driver’s license, your car registration, and you actually reside in the state of Nevada.
California has what’s called a residency tax on it. The state looks at how much time you actually spent in California. Where did you go to the grocery store? Where is your SG&E bill? Where’s your electric bill? Where did you fly in and out of? What sort of professionals did you hire? Did you hire California CPAs and attorneys, doctors and psychologists? Or did you have a doctor and a psychologist and an attorney and an accountant in Nevada? You need to make sure that the residency items they are going to look at are really going to show where you were residing during the period of time with an audit.
California has you in their system. This means if you continue to have rental property income, 1099 income, bank statements or information with California addresses on it, then the state of California is going to assume that you are still living in the state. So if you want to avoid a residency audit, you must actually move to the state you intend to reside in and actually reach out to resources in that state and begin living your life in that state.
It’s not just enough to say you’re going to move to another state. You really do need to actually move and become a part of that state. California does not mess around with residency audits. Additionally, the audit does not always always happen the first or second year you are gone. Typically it happens during the second or third year after moving; that is when you receive a notice of audit and a demand for a tax return. If you’re unsure whether you are a resident, non-resident or partial-year resident — or if you are selling a business and unsure about the tax liability — it’s best to speak with an experienced San Francisco tax attorney.
Allison Soares is a partner and tax attorney at Vanst Law LLP. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits from San Francisco to San Diego.
