By John Raspante, CPA, MST

No doubt, the COVID-19 pandemic caused an exodus of many taxpayers from large, centralized locations in cities to towns, and maybe even other states, from where they had worked previously. This phenomenon, coupled with an aging population seeking warmer and less expensive places to live, has fueled the need to prepare and be ready for when state tax departments challenge residency and domiciliary status.

The Pennsylvania Department of revenue says that individuals who are domiciled in the state or who are statutory residents are subject to Pennsylvania personal income tax on income, regardless of where the income was earned. However, residents and statutory residents may qualify for credits against tax paid to other states on income earned outside of Pennsylvania. Those who are neither domiciled in Pennsylvania nor have statutory residency in the state are taxed only on income from sources within Pennsylvania and do not qualify for credits against taxes paid to other states.

A person is considered a statutory resident of Pennsylvania unless one (or both) of the following are true:

• The person spends more than 181 days (midnight to midnight) of the tax year outside Pennsylvania.
• The person has no permanent abode in the commonwealth for any part of the tax year.

While these parameters appear rather clear, there are a few challenges. This blog looks at the Pennsylvania residency and domiciliary rules, the legal liability arising from residency and domiciliary audits, best practices in managing that liability, and possible opportunities.

Nailing Down Domiciliary

Statutory residency generally causes less concern than domiciliary rules, both in nationwide tax examinations and in legal liability defense. Basically, if you spend less than 181 days inside Pennsylvania, you’re not a resident. Establishing domiciliary tends to cause greater challenges because it is not black and white. Domiciliary tests, or residency audits, consider the following:

• In which location does the taxpayer have the greatest connections?
• What location does the taxpayer intend to be their home?

Factors such as the following are invariably considered (note: this list is not all encompassing):

• The taxpayers’ doctors, lawyers, and other professionals
• Bank and investment accounts
• Safe deposit box
• Real property
• Employment
• Memberships
• Licenses
• Burial plots

Clearly this is a more detailed, and challenging, test to prove.

The CPA’s Risk

With any increase in taxing authority oversight, professional liability claims are sure to follow. Allegations of not informing the client about the above rules are common, and failure to properly prepare for establishing residency is too common. A material dollar amount of tax authority assessments will result in finger pointing against the tax preparer; the significant dollar amount charged for representation can cause engagement letter quarrels.

To lower the frequency and severity of any claims resulting from a domiciliary audit, look to apply several best practices. Consider the following:

• Advise clients seeking to leave Pennsylvania with the issues that may be raised by the state.
• Review with clients selling their homes about possible residency rules.
• Assist clients with questionnaires sent by the state once they move from Pennsylvania.
• Use a strong engagement letter when representing clients in residency examinations.
• Send clients newsletters and articles on surviving a residency audit.
• Refer clients to tax specialists if you don’t have the required training in this area.

Claims have increased in this area, and likely will continue because there is an opportunity for states to increase revenue. Explaining the rules for residency can be complex and can be a value-added service, but you must know what you are getting into.

Consider webinars and podcasts on the subject to both ensure satisfied clients and protect yourself from liability exposure.

John F. Raspante, CPA, MST, is director of risk management at McGowan Pro in the New York metropolitan area. He can be reached at jraspante@mcgowanprofessional.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}