Trying to Leave California? Maybe Not: An Overview of California Residency Rules

If you intend to leave California and make another state or country your permanent home, avoiding California income taxes may be more difficult than you think.  Even if you do not live or earn income in California, you may be held to be a resident of California (or at the very least you may have to prove to California that you are a non-resident). 

If you file a California income tax return and claim that you are a non-resident of California, The Franchise Tax Board ("FTB") may conduct a residency audit. During this audit, you may be expected to provided (1) records detailng the purchase, sale or lease of real property (2) vehicle and vessel registration (3) Business activity information (such as employment contracts and travel logs) (4) Finacial records (including bank and credit card statements) and (5) records and information about your voting history and which service providers you have retained (i.e. doctors, attorneys, accountants, etc). 

Furthermore, if you do not file an income tax return in California and the FTB determines that you have some connection with the state of California, the FTB may prepare a proposed assessment of income taxes on your behalf.  If, for example, you hold a contractor's license in the state of California but do not live here, the FTB may estimate a reasonable salary for a contractor in California and assess taxes on this salary.  Examples of other contacts include: other licenses, owning a home, a vehicle or the payment of mortgage interest in California.  Once a proposed assessment has been filed, you must either contact the FTB and convince them that you are not a resident of California or file a nonresident tax return (which could be subject to a residency audit).  A successful determination that you are not a resident for one year may not prevent the FTB from preparing a proposed assessment on your behalf for the following year for the same reason.  

California defines "resident" as "every individual who is in this state for other than a temporary or transitory purpose and every individual domiciled in this state who is outside the state for a temporary or or transitory purpose."

The FTB claims that "the underlying theory of residency is that you are a resident of the place where you have the closest connections." The FTB has a list of factors to determine your residency status.  

1. The amount of time you spend in California versus the amount of time you spend outside of California.  
2. The state where your spouse and children are located
3. the state where your principle residence is located 
4. The state that issued your driver's license
5. The state where your vehicles are registered
6. The state where you maintain your professional licenses
7. The state where you are registered to vote
8. The location of the banks where you maintain accounts
9. The origination point of your financial transactions 
10. The location of your medical professional and other healthcare providers, accountants and attorneys
11. The location of your social ties, such as your place of worship, professional associations, social clubs and country clubs where you are a members. 
12. Location of your real property and investments 
13. Permanence of your work assignments in California. 

What does this mean for you if you have decided to leave California and take up residence in another state or country? This means that you have to substantially sever your connections with California when you leave and establish significant connections with the new state or country.  You may not maintain connections in California in readiness for your return.  

For example, you obtain a job opportunity in Arizona, leave California and move to Arizona on January 24, 2012.  Instead of selling your California home, you decide to keep it as a vacation home for when you come visit your grown children and friends.  You have an account with a California bank which you do not close. Your driver license does not expire for another three years and you make no effort to cancel it.  You also make several trips a year to visit your family and friends in California and, while there, you visit your regular doctor and/or dentist.  Under this fact pattern, if you are audited by the FTB, it may be determined that you are a resident of California for the 2012 tax year because you have maintained your connections in California in readiness for your return.  (These facts are similar to that of in the Appeal of Nathan H. and Julia M. Juran, where it was determined that Mr. and Mrs. Juran were residents of California).  

Those who are present in California for a vacation or a business transaction, are not automatically considered residents.  Nevertheless, when the visit becomes for other than a temporary or transitory purpose, you become a California resident.  This purpose could include being assigned to an office in California for an indefinite period or an indefinite recuperation period from an illness or injury. In addition, being present in California for more than nine months creates a rebuttable presumption that you are a California resident.  This is regardless of whether you also have connections with another state and consider yourself a true resident of that state (i.e. your wife and children remain in Arizona).  

In conclusion, if you intend to leave California, your intent to leave and make another place your permanent home is not enough.  Instead, California looks at whether the physical facts demonstrate that you have have relinquished your California residency.  Likewise, if you are present in or have contacts with California but consider yourself a resident of another state, you may still have to convince the FTB that you are not a resident and therefore are not subject to California income taxes.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.  

S.B. 459: California's Attack on the Independent Contractor Classification

It is not uncommon for business owners to avoid paying taxes and employee benefits (i.e. overtime pay) by hiring independent contractors instead of employees. These business owners are already at risk of an audit by the Employment Development Department and the IRS.  If the audit ends up in a reclassification, the business owner will be responsible for unpaid taxes, possible penalties and interests.  

Now, as a result of new California legislation, this practice of misclassifying workers can end up costing business owners and their advisers everything.    

• S.B. 459

As of January 1, 2012, the California Legislature enacted a harsh new law targeting the misclassification of workers as independent contractors by California business owners. Under S.B. 459, a business owner can be found to have engaged in the following unlawful activities:

1. The "willful misclassification" of an individual as an independent contractor and/or
2. Charging a willfully misclassified worker a fee, or making any deductions from compensation for any purpose that would have violated the law governing deductions from pay (Labor Code sections 221 and 224) had the worker properly been classified as an employee.  

Additionally, non-lawyer consultants are subject to joint liability for knowingly advising a business owner to classify a worker later determined to be an employee.

• Penalties

This laws allows California's Labor Commissioner or a court to levy a civil penalty of $5,000 to $15,000 for each violation found "willful." If it is also determined that the business owner engaged in a pattern or practice of "willful misclassifications" a civil penalty of $10,000 to $25,000 may be imposed. 

Additionally, this law also empowers the Labor Commissioner to assess additional damages of behalf of those misclassified (the workers themselves). As a result, if a business owner misclassifies a large group of workers as independent contractors, the business owner may be subject to a class action law suit by this group.  

• "Willful"

The key word here is "willful". "Willful misclassification" is defined as "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor." Although this standard appears to be more stringent than the "voluntary and intentional" standard proposed in earlier versions of the law, it is still problematic because courts have defined "knowing" to included constructive knowledge. As a result, if it is found that the business owner should have known that the worker should have been classified as an employee, the misclassification will be found willful.  This is a very vague and subjective standard that will cause a lot of uncertainty and is unlikely to protect business owners who are simply mistaken about the proper classification.  

• Notice

In addition to the penalties, the law also requires the business owner to post a notice (either on its website or place of business accessible to all employees and the general public) at each location where a violation occurred.  This notice must contain the specific information about the violation, be signed by an officer and be posted for one year.  

In sum, this new law imposes potentially crippling and humiliating penalties upon California business owners who improperly classify their workers. Since the standards for determining whether a worker is an independent contractor or an employee are also often subjective, this law will likely excessively burden California business owners.  If the goal of the California legislature is to inflict fear in California business owners and thereby do away with most independent contractors, the new law will most likely succeed.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.  

What You Should Know If You Have A Foreign Bank Account

Currently, the IRS considers international tax enforcement its top priority. Therefore, if you have a foreign bank account, it is extremely important to be aware of your reporting requirements or else be subject to substantial penalties and criminal prosecution.

• The 2012 Offshore Voluntary Disclosure Program ("OVDP") 

On January 9, 2012, the IRS announced its third OVDP.  The purpose of this program is to help people with undisclosed income from foreign accounts become current with their US tax obligations.  The IRS has not yet released additional guidance to assist taxpayers in participating in this program and there is no deadline to participate (currently the guidance in existence is from the 2011 OVDP). 

Only those taxpayer who are not currently under civil or criminal investigation by the IRS may participate in this program. 

For those who choose to participate in this program by making a voluntary disclosure, the IRS promises that significant civil penalties and criminal prosecution will not be imposed.  In order to participate:

1. The taxpayer must file FBARS (see below) and amended income tax returns for the last eight years
2. The taxpayer must pay all income tax owed to the U.S.  plus a 20% accuracy-related penalty and interest for the eight years of returns 
3. The taxpayer must pay 27.5% of the highest aggregate balance in the undeclared foreign account during the past eight years.  There are exceptions to this rule.  

• FBARS

U.S. persons must disclose their financial interests in, signature authority over or other authority over, foreign bank, security or financial accounts if the aggregate value of each account(s) exceeds $10,000 at any time during the year.  This requires the filing of a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR").  The FBAR is an information return which is filed separately from the taxpayer's income tax return.  The deadline to file an FBAR is June 30th. 

If the IRS determines that a taxpayer's failure to file this form is willful, the IRS can impose substantial civil and criminal penalties.  If the violation is not willful, the penalty shall not exceed $10,000 per violation.  If the failure to file is due to reasonable cause and the account was properly reported, no penalty should be imposed.  

For each willful violation, the IRS shall impose a penalty which is the greater of $100,000 or 50% of the value of the account at the time of the violation (the time of the violation occurs on the due date for filing the FBAR).  A willful violation also subjects the taxpayer to five years in prison and/or a maximum fine of $250,000.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.