Any CA residency experts?

Technical topics regarding tax preparation.
#1
Andrew  
Posts:
806
Joined:
21-Nov-2018 5:00pm
Location:
CA
The following situation has turned complex because of a payroll issue. I want to cross the t's and dot the i's.

Client was paid by US company for the period 6/30/19 through 2/29/20. My client lived in CA until 6/30/19 and moved to the UK on 6/30/19 to work on a foreign assignment for a UK affiliate of the US company. The assignment had no end date. She left the UK on 12/20/20 for the US because of Covid-19. Client returned to CA on 1/31/21. For the full period 6/30/10 through 1/31/21, she didn't spend 1 day in CA.

The problem: US company paid client for 2019 as being a CA resident for the full year. The US company also paid her for 2 months in 2020 as a CA resident. W-2 shows CA income and CA SDI withheld. Client's address on W-2 is in CA. Client says she changed her address to her UK address in the payroll system. I have payslips from the UK for the entire period, including her UK address.

Per my research she's not a CA resident for the period 6/30/19 through 2020: 546 days out of state and you're no longer a resident.

In order to avoid CA FTB problems about residency, the W-2s for both 2019 and 2020 need to be amended. Client should get a refund for overpaid SDI and CA income tax. Has anyone encountered CA FTB residency audits in a similar scenario? Or anything else I should be aware of? I've never had to deal with a residency audit and want to be prepared if this has a high likelihood of turning into one.
 

#2
Posts:
292
Joined:
14-Jan-2021 4:58pm
Location:
Texas
Forget about the W-2s and the withholdings and CA addresses. If your client qualifies for the 546, they're not a resident for tax purposes. Nothing needs to be amended, and seems unlikely you could get an employer to amend a 2019 W-2. If any refunds are necessary, those will be accounted for on the return.

In terms of preparing for the audit - prepare for the day count. Your client would have to prove that they were not in the state on every single day (though sometimes auditors "take notice" based on facts and circumstances and don't dispute every single day).
 

#3
mariaku  
Posts:
364
Joined:
11-Jul-2014 1:19pm
Location:
Oakland, CA
California taxes its domiciliaries (including non-residents) on their worldwide income. It is irrelevant if you spent a single day in California as long as your domicile remained in CA.

California’s tough Franchise Tax Board (FTB) polices the line between residents and non-residents, and does so rigorously. Like other high tax states, California is likely to probe how and when you stopped being a resident. For that reason, even if you think your facts are not controversial, be careful. A California resident is anyone in the state for other than a temporary or transitory purpose. It also includes anyone domiciled in California who is outside the state for a temporary or transitory purpose. The burden is on you to show that you are not a Californian.

Although the IRS can audit 3 or 6 years, California can sometimes audit forever. California, like the IRS, gets unlimited time if you never file an income tax return. That can make filing a non-resident tax return—just reporting your California-source income as a non-resident—a smart move. California looks to objective factors to determine residency. Your time in California versus time outside counts. California uses a comparative analysis to see if you have closer connections to another state. Consider the size and value of your residences, and the location of the property on which you claimed the homeowner’s property tax exemption. Where your driver’s license was issued, cars are registered, professional licenses, registration to vote all counts. So does the location of your banks, doctors, dentists, accountants, church, temple or mosque, and more. What clubs are you a member of, and where?

Where do you work, and have business and social contacts? Where do you have all your mail sent? But as you might expect, physical presence is the biggest issue. If you spend more than 9 months in California, you are presumed a resident. If you spend 6 months or less in California, you may qualify as a seasonal visitor, but only if you don’t work while you are here and meet other tests. If you leave, consider this checklist:
1. Get a new other state driver’s license, and turn in your California one.
2. Move and register your car(s) in your new state.
3. Notify California DMV, move vehicles and re-registration.
4. Insure cars and real estate with insurance in the new state
5. Register to vote in the new state.
6. Cancel California voter registration for old residence.
7. Terminate California club memberships.
8. Join clubs and social groups in the new state.
9. Relocate family to the new state.
10. Move cherished family heirlooms (photos, keepsakes, etc.) to home in the new state.
11. Sell, list for sale, or lease (preferably a long-term lease) any California property—selling is best.
12. Terminate lease of any California property.
13. Lease (long-term) or buy residence in the new state. Buying is best.
14. Notify friends and family of permanent move out of California.
15. Notify banks, credit card companies, etc. of move and provide new state address for statements. Have correspondence including bank statements, credit card statements, etc., sent to new state address.
16. Use healthcare providers and other advisors (except with regards to advice concerning California taxation) in the new state.
17. File change of address forms with US Postal Service and IRS.
18. Notify all contacts of change of address and permanent move.
19. Obtain new state phone numbers.
20. Send holiday cards, birthday cards, and other correspondence from home in the new state.
21. Change professional affiliations and licenses as needed to the new state
22. Establish office or workplace in the new state.
23. Limit physical presence in California as much as possible.

Moving sounds easy, but if you aren’t careful how you do it, you could end up saying goodbye California high taxes, and hello residency audit! Should this discourage you? No, but it pays to know what you are up against, so get some advice and be careful out there.
 

#4
Posts:
292
Joined:
14-Jan-2021 4:58pm
Location:
Texas
Very helpful post, and the advice on changing domicile applies (generally) across all states, so it can be good to use that checklist for any state someone is moving to.

However, I disagree that non-resident domiciliaries (i.e., taxpayers who meet the 546 day rule) are subject to tax in California on their worldwide income. Also, the 546 day test is objective, the domicile factors don't matter.

That said, if your client is not planning to go back to California, it's better to do everything to evidence a change of domicile now instead of relying on 546. You still have 546 as a backup, but it can help in a later year when maybe your client spends 50 days in the state by accident - you can claim they already changed their domicile.
 

#5
mariaku  
Posts:
364
Joined:
11-Jul-2014 1:19pm
Location:
Oakland, CA
I agree that the 546-day-rule is an established safe harbor, but you better have it on a single contract (not a one-year contract originally, extended to 546 days later), and you better have your entire family with you abroad the whole time.

Maria U. Ku, CPA
Oakland, CA
 


Return to Taxation



Who is online

Users browsing this forum: CaptCook, CoastalCPA, Eduardo, golfinz, Google [Bot], Google Adsense [Bot], itssewtaxing, JoJoCPA, JR1, Nilodop, rbynaker, Seaside CPA, SumwunLost, TaxDude, Terry Oraha, Treetopclimes and 199 guests