New Audit Guidelines in New York: A Change to the 11-Month Rule

Recently, the New York State Department of Taxation & Finance released new nonresident audit guidelines, without any announcement or fanfare. Being the first official update to the guidelines since 2014, we were excited to crack them open! But, alas, our hopes were soon dashed; the changes to the guidelines turned out to be mostly minor.

However, there is one change that is worthy of attention and further discussion. Specifically, the Tax Department changed the guidelines for what constitutes maintaining a permanent place of abode (PPA) for “substantially all of the taxable year.” Starting in 2022, the former “11-month rule” is now a 10-month rule.

Under the statutory residency test, an individual is taxed as a New York State resident when they spend more than 183 days in the state AND maintain a PPA in the state “for substantially all of the taxable year.” Before 2022, the guidelines made clear that “substantially all” meant a period exceeding 11 months. This 11-month rule was prevalent in other places as well, including tax return instructions, guidance on the tax department’s website, and other sources. But the new guidelines change this rule to define “substantially all of the year” to mean a period exceeding 10 months, beginning in tax years beginning in 2022.

To understand the rule in context, consider the following scenario. A taxpayer is domiciled in Connecticut, but works in New York City throughout the year. If that taxpayer acquires a permanent place of abode on February 21 of the taxable year and spends 184 days in New York, they will be taxed as a resident under the new 10-month rule. In contrast, under the old 11-month rule, the taxpayer in the above scenario would not be subject to tax as a resident. Another example, suppose a taxpayer maintains a PPA in New York, spends 184 days in New York, but disposes of the residence on November 3. Under the old rule, the taxpayer would not be subject to statutory residency because they did not maintain the PPA for more than 11 months. But under the new rule, that same taxpayer would trigger statutory residency, at least if this guidance holds.

Will it hold? Normally we’d see a rule like this in the statute or at least in a regulation. But here the Tax Department has just issued new guidelines. There’s been no formal change, and in fact under the Permanent Place of Abode guidance on the Tax Department’s website, the 11-month rule is still listed! So it remains to be seen how this change will play out in audits, but since the guidance is effective for tax years beginning in 2022, I guess we won’t see it pop up in audits for a while.

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