Hartford Business Journal

www.HartfordBusiness.com • November 25, 2019 • Hartford Business Journal 15 at West Hartford-based accounting and consulting firm blumshapiro. "There is a misconception out there that if you just spend less than 183 days in Connecticut that you won't be considered a resident in the state. But there is also a more sub- jective test, the domicile test, and if the state still considers you domi- ciled here, that you haven't left for good, then they can still sweep you in and make you pay taxes." Of the dozen or so tax lawyers and accountants contacted by Hartford Business Journal all said they have seen a significant in- crease in calls from clients seeking advice on how to relocate out of the state and avoid paying taxes here. That mirrors data showing Connecticut's steady population decline in recent years. More than 884,000 Connecticut residents moved to another state during a nine-year period starting in 2010, compared to 720,869 who moved in, for a net loss of more than 163,373 residents, according to an HBJ analysis of U.S. Census Bureau data. Not everyone, however, is fleeing to a low-tax destination. In fact, New York and Massachusetts are among the top states where resi- dents here are moving. Regardless, it's the highest-earning residents who change their tax status that Connecticut keeps close tabs on, lawyers and accountants said. Department of Revenue Services Commissioner Scott Jackson said in the 2017 tax year, the top 100 taxpayers in the state paid $1.2 bil- lion in taxes — a higher-than-usual number — vs. $899 million paid by all corporations. That shows Connecticut is highly dependent on its highest earners and any changes in their tax-filing status could have a material impact on the state budget, Jackson said. As a result, DRS keeps a close eye on the tax returns of the state's top 100 earners; any change in their residency will usually automatically trigger an audit. The state has seen several high- profile individuals change their residency in recent years, including billionaire and hedge-fund man- ager Paul Tudor Jones and former Gov. M. Jodi Rell, who both made Florida their primary homes. Of the 548 people employed at DRS, nearly half work in the agency's audit and compliance division, which has experienced significantly more activity in recent years. In fiscal 2019, the agency com- pleted 197,066 compliance activities, which includes tax-return reviews and audits, up 83 percent from fiscal 2015, according to DRS data. Of those, 33,132 cases were handled by DRS' income-tax auditors — up 63 percent since fiscal 2015 — who work on domicile cases. Part of the increase in compliance activities, DRS said, had to do with the state's recent Fresh Start program, which allowed delinquent taxpayers to come forward voluntarily and get current on their tax obligations. Jackson, who has been DRS com- missioner since June 2018, said his agency isn't really doing anything different on domicile audits than it has in the past, but it has brought on more auditors in recent years to pre- pare for a coming retirement wave. However, his predecessor, Kevin Sullivan, said the agency under his watch got more aggressive in look- ing at people who changed their permanent home status, because he thought the incentives to flee to lower-cost states, but not fully leave Connecticut, were getting greater. "I wouldn't say it was a crusade of any kind, but we were training people more, particularly auditors, to look at changes in residency, particularly in cases with high-end earners, and in some cases busi- nesses," said Sullivan, who was tax commissioner under Gov. Dannel P. Malloy from 2011 to 2018. Residency vs. domicile Individuals can have several residencies, but only one domicile, which is where people intend to make their permanent home. Domicile is also key to determin- ing where an individual or business pays certain state or local taxes. Connecticut's law gets complicated for residents who try to change their domicile, while still maintain- ing a home here, said Switajewski, the blumshapiro accountant. For those who pack up and leave the state entirely, the risk of an au- dit diminishes, unless they return a few years later. Ultimately, it's up to taxpayers — not the state — to convincingly prove they've relocated their domi- cile, and individuals have to intend to leave Connecticut for good, Switajewski said. "It can be a heavy burden to prove that," he said. The two-tiered test used by the state to determine an individual's domicile has both an objective and subjective component, and requires significant paperwork and proof to pass. The law also leaves room for interpretation on the state's part, creating gray areas that can be hard for taxpayers to discern, lawyers and accountants said. The first test requires an indi- vidual to prove they spent 183 days or more outside Connecticut. It's straightforward, but if you're audit- ed, you better have plenty of paper- work to prove your whereabouts, said John Mezzanotte, managing partner of accounting firm Mar- cum's Greenwich office, who deals with high-net-worth individuals in Connecticut and New York. In many cases, lawyers and ac- countants recommended clients keep a daily log of where they are, and collect plane tickets, receipts and other documents to prove each day they are outside the state. Mezzanotte said his clients are also increasingly using mobile apps — like Monaeo and TaxBrid — that track their daily location. Near and dear items The second test is the domicile test and it considers 28 factors, including things like family, busi- ness and social connections, home and other real estate holdings and personal belongings. For example, if an individual's Con- necticut home is larger than their Florida house that could be a prob- lem. Some accountants recommend renting out a Connecticut home to prove it's not a permanent residency. Where an individual locates their personal — or near and dear — items, including pets, expensive jewelry, im- CT's net population loss Connecticut has lost population in each of the last nine years with the net outmigration totaling 163,373 people from 2010 to 2018. Year In-migration Outmigration Net population loss 2018 84,718 114,235 -29,517 2017 83,325 98,971 -15,646 2016 75,586 112,914 -37,328 2015 76,997 103,343 -26,346 2014 82,746 95,501 -12,755 2013 88,351 91,600 -3,249 2012 80,311 87,023 -6,712 2011 71,502 91,295 -19,793 2010 77,333 89,360 -12,027 Total 720,869 884,242 -163,373 Source: U.S. Census Bureau Shipman & Goodwin attorney Lou Schatz said he represents individuals caught up in tax audits or litigation related to changes in their domicile. Continued on next page >> HBJ PHOTO | GREG BORDONARO

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