Federal and State Tax Residency Rules: Latest IRS Examination Guidance and Navigating State Tax Regulations

Description

Advising taxpayers on issues relating to residency has become even more cumbersome. The IRS LB&I unit has issued examination guidance focused on taxpayer residency and the application of U.S. income tax treaties. State tax residency rules and an increase in state audits and enforcement require tax professionals to become knowledgeable of new state residency and allocation issues to implement effective tax planning strategies for taxpayers.

Federal tax residency rules applicable to individuals or businesses are relatively straightforward but can be burdensome to evaluate depending on the facts and circumstances. Tax treaties seek to eliminate or reduce double income taxation, and benefits are available to nonresident aliens and U.S. citizens living abroad under some conditions. Due to the critical nature of residency for tax purposes, taxpayers must understand residency rules and applicable tax treaties that will determine if they are subject to taxation, the necessary forms to file, and if they qualify for any exemptions.

Also, state regulatory challenges to taxpayer residency and overcoming them is an obstacle faced by many individuals with dual-residency between states or by companies operating in multiple jurisdictions. State residency determination is based on more than declarations or physical presence in the state, and the burden of proof falls on the taxpayer in such cases. This fact is typically learned the hard way by taxpayers resulting in the endangering of assets and being subject to tax liability that could have been limited or avoided with careful planning.

Listen as our panel discusses key components of federal and state residency rules, state residency and allocation challenges, and effective tax planning techniques to limit unintended tax liability and manage nonresident audits.