Authored by Frank Czekay and Donna Scaffidi The global pandemic that has permeated our existence for the last 16 months has taught us that work doesn’t have to be done in an office. When the emergency orders were issued in March and April of 2020, confining most of us to our homes, remote work became the norm rather than the exception. As things progressed, people escaped the cities and urban areas and began working remotely. In today’s world, it has become commonplace to relocate on either a temporary or permanent basis. Whether it is escaping a global pandemic, for a sought-after change, such as a dream job in another state, a post-retirement move to a warmer climate, or for reasons less opportune – military service, serious illness or divorce – don’t let an unintended impact of relocation be an unanticipated state tax bill. Multiple states will claim to be your state of residence and attempt to tax your income. Increasingly, states are challenging former residents who attempt to change their domicile to another state. Residency audits are on the rise, particularly in states where larger numbers of residents are more likely to spend winters elsewhere. Although the rules vary among states, generally speaking, most states define a “resident" as an individual who is in the state for other than a temporary or transitory purpose. States consider a person’s “domicile" to be the place of his or her permanent home to which he or she intends to return to whenever absent from the state for a period of time. Most claim the right to tax an individual’s income if they are believed to be a resident and domiciled in that state. Generally, states also impose tax on 100% of a resident’s income from all sources, including portfolio income. Many states have exceptions for military personnel in active service and for individuals receiving medical treatment for an extended period of time.  During the global pandemic, some states issued guidance that relaxed enforcement of their residency rules while executive orders were in effect. As the executive orders are set to expire, the guidance on relaxed enforcement of the residency rules are also expiring. If employees are continuing to work remotely and have relocated to other states to work, this could cause dual residency issues for the employee. Individuals who may also be caught in the trap of dual residency and dual taxation, include:  Retirees with a second home in another state Taxpayers who live in one state but have business activities or interests in another state,  Individuals who have relocated to another state but return after a number of years Individuals who temporarily relocate to another state or overseas for a job assignment Individuals who have severed all ties with a state but fail to establish residency or domicile in another state Typical factors states use to determine residency Often, a major determinant of an individual’s status as a resident for income tax purposes is whether he or she is domiciled or maintains an abode in the state and are “present" in the state for 183 days or more (one-half of the tax year). California, Massachusetts, New Jersey and New York are particularly aggressive in this respect. There and elsewhere, taxpayers have the burden of proving through documentary evidence, which states they spend time in during the year and how long they remain in these states. Other evidence often considered in evaluating whether there has been a permanent change in domicile includes: Location of employment Classification of employment as permanent or temporary Location of business relationships and transactions, such as active participation in a profession or trade or substantial investment in or management of a closely held business Serving on the board of directors for a business or charity Living quarters—whether a person’s former living quarters were sold, rented out or retained, and whether he or she leased or purchased real property in his or her new location The amount of time spent in the state versus amount of time spent outside the state (183-day rule) State where the taxpayer is registered to vote The state of issuance of a driver’s license or fishing/hunting permits Location of the school a family’s child attends Memberships in country clubs, social or fraternal organizations In residency audits, state auditors will review: Credit card statements—where charges are incurred, where the bill is sent and the location of the checking account used to pay the bill Location of bank accounts, investments and other financial transactions such as automated teller machine withdrawals Resident and nonresident fishing/hunting licenses and park admissions Freeway fast-lane pass charges (EZPASS, SUNPASS, etc.) Records of airline frequent-flier miles Jurisdiction issuing a driver’s license, vehicle registration, professional license or union membership Homestead tax abatement or credit applications and property tax bills Church attendance and membership Location of doctors, dentists, accountants and attorneys Official mailing address and where mail is received Where an individual is registered to, and actually does, vote If you live elsewhere but travel on a regular and frequent basis to another state, it is a good idea to maintain a diary or location log that clearly indicates the dates on which you are in a specific state, accompanied by supporting records such as transportation tickets and receipts. Remember that any part of the day spent in a state, other than when traveling through the state, is generally considered a day spent in the state for residency determination purposes. Note that the allowable level of participation in charities and social organizations varies among states. Some states like Wisconsin do not count such participation against taxpayers claiming nonresident status. Action steps to take when changing your residence Changing one’s residence takes planning and is a proactive process. While courts consider taxpayer intent in state residency disputes, they ultimately look to documents and facts to decide where the state of domicile is. Careful documentation is of the following is key: Note the date of your change of residence Document in writing the reason for the change in residence which shows basis and intent (i.e., permanent retirement and relocation) Obtain a driver’s license in your new state Register your vehicles in your new state and insure your vehicles in the new state File a resident income tax return in your new state Revoke any homestead claims or election on your home in your former state and file similar documents in your new state of residence Register to vote in your new state Open bank or brokerage accounts in your new state Replace involvement with business, charities and other organizations in your former location with activity in such organizations in your new residence Change the mailing address for all bills, banks, insurance, doctors, etc. to your new state address Keep a calendar of when you are in your former state versus when in your new state or states Retain airplane tickets, credit card statements, hotel records, etc. that will support your calendar Change professional licenses to your new state (if applicable) Establish relationships with new doctors, dentists, accountants, attorneys, etc. If you have previously filed a tax return in your current state but are changing your residence, it is imperative that you closely observe the formalities of making a change of residence and that you retain all documentation you may need to prove your new residency. State tax law generally holds that you are not deemed to have created a new domicile until you have abandoned your former state of residence. In addition, be sure to keep that documentation until your former state’s statute of limitations permitting them to audit a return runs its course. Changing domiciles while continuing to be actively involved with a closely held company is especially complicated. It can be done, but only with proper planning. However, a portion of the compensation earned or profits from a "pass-through" entity (e.g., S corporation) will remain taxable by the state or states in which business is conducted or services are rendered by the owner to his or her company. There are many documented cases of states successfully asserting tax claims on former residents’ income. In some instances, this has occurred many years after the individuals moved to another state or took a job overseas and returned to the US. When changing your residence, be sure you consult with a tax professional so that you understand the benefits (such as lower tax rates) as well as the potential pitfalls. Don’t pay state tax on more than 100% of your income For more information on this topic, or to learn how Baker Tilly specialists can help, contact us.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Real Estate

State & Local Tax

Dual state residency can result in dual taxation

State and local governments have received and are continuing to receive federal funding to respond to the COVID-19 pandemic, including Fiscal Recovery Funds (FRF) as part of the American Rescue Plan Act of 2021 (ARP). Many governments hope to use a portion of these funds to pay for, among other critical needs, consulting services to help develop a strategic approach to leveraging the full allocation. With federal funding of this magnitude comes a lot of uncertainty. In the below FAQ, Baker Tilly provides answers to commonly asked questions surrounding rules governing ARP funds.
For more information on this topic, or to learn how Baker Tilly state and local government specialists can help, contact our public sector team.

This FAQ answers commonly asked questions about rules governing American Rescue Plan (ARP) funds.

State & Local Government

Tribes

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Municipal Advisory Services for Local Governments

Municipal Advisory

Using American Rescue Plan funds to procure consulting services

The American Society of Civil Engineers, in partnership with the Value of Water Campaign of the US Water Alliance, has estimated that the annual costs of the continuing pattern of underinvestment in the drinking water and wastewater systems in the United States will rise from an estimated $2 billion in 2019 to $14 billion by the year 2039. That is a seven-fold increase over 20 years[1]. The same report concluded that lagging federal investment in the nation’s water infrastructure is placing added pressure on state and local governments to act and that a failure to act could lead to a cumulative gross domestic product decline of $2.9 trillion by 2039 and a $7.7 billion rise in cumulative healthcare costs over the same period.  For virtually all local governments, the costs of replacing and upgrading utility assets demands a significant and continuing investment, often resulting in higher user fees and charges. Historically, many of these essential projects have been financed with long-term debt funding as federal and state grants to help offset the local share of these projects have been limited. Well before the COVID-19 pandemic, water and sewer utilities were facing a number of challenges, including aging infrastructure creating a need for asset renewal and replacement, increased regulatory requirements, the impacts of climate change, a growing emphasis on protecting our environment, limited water supply and others. Interwoven in all of these challenges has been the impact on affordability of utility services resulting from them. Fortunately, some help may be on the way. Local governments have been allocated $130.2 billion under the provisions of the American Rescue Plan Act (ARP). Eligible uses of these funds include water, sewer and broadband infrastructure, among others. Due to the overall impact on local communities and the myriad economic, health and other quality of life benefits infrastructure improvements can produce, such projects will likely become top contenders as local governments develop their plans for the use of ARP funds.  Municipal leaders should consider the adoption of an inclusive and analytical process for setting infrastructure spending priorities and in determining whether to spend their ARP funds on utility infrastructure or other eligible local needs or opportunities to maximize grant funding. One such technique could be the development of a “heat map” of various evaluative criteria, customized to the policy priorities of each community, as illustrated below. Using a weighted scoring model with defined evaluative criteria and a facilitated ranking process, decision makers can efficiently evaluate the strengths and weaknesses of each infrastructure project under consideration. The heat map reveals the relative strengths and weaknesses of each project, leading to more reliable, repeatable and equitable priority-setting.  The evaluation criteria included in the above example include: ARP eligibility – the degree to which the specific project conforms to the federal eligibility guidelines for infrastructure projects Environmental impact – the relative positive benefits on the natural environment that the project will produce Regulatory compliance – the extent to which the project addresses regulatory imperatives, consent decree requirements, etc. Improved access – the degree to which the project improves citizen access to utility services in terms of both availability and cost Customer impact – the number of utility customers who will realize a direct and/or indirect benefit from the project Economic impact – the significance of the project’s expected impact on the community’s ability to attract, retain and expand its economic base through new businesses Green infrastructure – the level of overall contribution of the project to the community’s “green” programs and initiatives Climate impact – the relative level of positive contribution to the mitigation of the effects of climate change Public health benefit – the degree of public health benefits or the mitigation of public health risks Cybersecurity enhancement – the comparative reduction in the risk of security breaches to the utility’s technology systems Financial sustainability – the degree to which the project enhances the long-term financial stability of the utility Community support – the degree of public support for the project A well-designed, analytically-supported decision process and strategic plan can help utilities determine how to best apply their ARP funding to help offset the local costs for critical infrastructure investments and help to minimize utility rate increases. Contact Baker Tilly’s public sector specialists to further explore how your utility can maximize the benefits you realize from the ARP relief funding.

A well-designed decision process and strategic plan can help utilities determine how to best apply ARP funding to support infrastructure needs.

Power & Utilities

Municipal Advisory Services for Utilities

Public Sector Performance Optimization

Public Sector Financial Management Advisory

Prioritizing utility infrastructure spending: an analytical approach

Authored by Ashley Deihr, Colleen Lewis and Kimberly Macedo How a strategic internal audit partner can protect and enhance value at your organization
Internal audit in a time of transition Internal audit functions across industries are at a crossroads. At a time of increasing financial pressures, regulatory scrutiny and stakeholder expectations, organizations rely on internal audit to help assess and mitigate emerging risks across a wide spectrum of critical and time-sensitive strategic, financial and operational elements. Internal audit practitioners are expected to help their organizations manage risks as wide-reaching as financial controls, cybersecurity, talent management and fraud. At the same time, as we recover from the pandemic, internal audit shops are faced with turnover driven by an increasingly flexible and mobile workforce.  Compounding all this, internal audit is expected to work smarter, faster and harder by embracing agile auditing, leveraging data analytics and integrating with enterprise risk management (ERM) and compliance functions. The pressure to be effective, efficient, knowledgeable and collaborative change agents has never been greater. How a strategic internal audit partnership can address six common challenges Finding the right internal audit partner to provide co-sourced or outsourced support can help both your organization to manage this time of change and your internal audit function to serve as a trusted and valuable member of leadership. Consider the following key successes that can be driven by a strong third-party internal audit relationship: Challenge No. 1: Your audit committee expects expertise in an ever-widening list of topics. Solution: A co-sourced or outsourced internal audit partner brings a multitude of skillsets and deep expertise to the table. A firm well-versed in your industry’s particular risks can help you see over the horizon to address emerging risks (such as the following) and meet the expectations of your most sophisticated leaders: Governance ERM Regulatory compliance (federal, state, local, industry-specific) Strategic budgeting and fiscal resiliency Fraud risks Cybersecurity Diversity, equity and inclusion Contracts and grants management Talent management Further, in co-sourcing arrangements your team members can join integrated project teams to gain firsthand understanding of complex technical topics, learning priceless knowledge that can be leveraged for the next project, while allowing for career progression and exploration. Challenge No. 2: Your internal audit function has faced recent turnover, leaving you with open positions and skills gaps. Solution: Co-sourcing can provide you with fully equipped teams to seamlessly perform audits on a standalone basis, or the ability to supplement your existing teams with the specific levels of professionals you might be missing. A third-party internal audit partner allows you to quickly staff up or down to meet the changing needs of your organization, which is especially critical in an agile environment. The right partner will include professionals ranging from recent college graduates to seasoned professionals with 30 years of experience, allowing any gaps to be filled with the right resource. And in a high turnover environment (think The Great Resignation), an effectively managed outsourced or co-sourced relationship can actually lead to greater retention of organizational knowledge. The flip side to the recent shift towards remote work is that it is easier than ever to leverage the unique knowledge and skills of a third-party partner regardless of geographic location. Many engagement activities can now be completed successfully in a virtual environment.   Challenge No. 3: Your organization has limited funding budgeted for an internal audit function. Solution: Outsourcing or co-sourcing internal audit services can provide exceptional value. Internal audit activities performed by a partner firm can be budgeted on a yearly, hourly or project basis, ensuring that your organization only pays for the services it needs. In contrast, with a fully in-house internal audit function, your organization must fund a consistent level of salaries, benefits, training and nonproductive time, as well as technology and infrastructure costs related to employees. An outsourced or co-sourced model allows the internal audit budget to expand or contract over time as budgets and relative risk priorities shift, enabling a more agile approach to internal auditing. In addition, in an increasingly remote environment, organizations have been able to decrease the travel costs often associated with using a partner firm; rather, onsite work can be thoughtfully agreed upon considering the relative costs and benefits. Challenge No. 4: Your leadership wants internal audit to bring a competitive edge to its strategy and operations. Solution: An internal audit partner operates in a variety of organizations, including your competitors, peers and aspirational peers, and can therefore provide industry-leading perspectives to help you: Identify blind spots in your risk assessment and audit planning Maximize systems implementation and usage Implement effective monitoring and analytics practices Assess design of controls for reasonableness and efficiency Garner the support needed to invest in key enhancements Challenge No. 5: Your audit committee expects an objective perspective for certain internal audit activities. Solution: An outsourced or co-sourced internal audit partner comes to the table with a fresh perspective, untainted by organizational politics, history or relationships with stakeholders. The right partner can help invigorate the risk assessment and risk-based audit planning processes, handle investigations with sensitivity and independence and perform diplomatic advisory work requiring buy-in from multiple stakeholders. Challenge No. 6: Major initiatives and changes have stalled with leadership. Solution: An internal audit partner can serve as a thought leader to help to move forward ideas that have stalled, whether it is implementing a new system, exploring ERM or rethinking your internal controls structure. Your internal audit partner can help you understand and explore cutting edge changes, as well as educate your stakeholders on the possibilities and impacts of change; these professionals have often explained major past projects in whitepapers and industry presentations that can be leveraged to gain buy-in across your organization. An internal audit partner doesn’t need to be afraid of pushback, so it can bring fresh and exciting new thoughts to the table. The sky is the limit!
Choosing the right co-sourcing or outsourcing model for your organization Internal audit co-sourcing and outsourcing relationships can vary along a spectrum, with each model delivering certain common successes and challenges. Some of the most typical models are outlined below along with key considerations which may work best at your organization:
Industry spotlight Hear firsthand from our industry-specialized professionals how internal audit co-sourcing and outsourcing can benefit organizations across industries.
An organization’s internal audit function is key to ensuring that strategic risks are appropriately managed and mitigated. The combination of external forces (a complex regulatory environment, rapidly evolving technology, increasing cyber threats and uncertainty brought about by events like the COVID-19 pandemic) and internal forces (increasing demands from organization leaders and skill gaps, for example) should compel leaders to investigate working with a co-sourced or outsourced internal audit partner. These partners can not only help make today’s increasing challenges solvable, but can help internal audit to add value across a wide spectrum of risks, operate more efficiently and better partner with leadership in supporting the organization’s success. For more information or help choosing the right sourcing model for your organization, contact our industry-specialized internal audit professionals.

Practical tips for using a co-sourced or outsourced model to overcome common internal audit challenges

Healthcare & Life Sciences

Higher Education

Financial Services

Government Contractors

Manufacturing & Distribution

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Risk Advisory

Internal Audit

Outsourcing & Managed Services

Internal Audit for Life Science Companies 

Internal audit: understanding co-sourcing and outsourcing models

Are you overwhelmed with the number of technology solutions? This e-book provides practical information and advice to evaluate, implement and successfully adopt new technologies.
Video For years, companies have looked to better enable their organizations and serve their customers by considering – if not embracing – digital technologies. The COVID-19 pandemic, which emptied buildings as employees shifted to working from home, changed the customer buying experience and had a  severe impact on production lines and supply chains. This compelled many to accelerate their search for technology or automation solutions. An organization’s ability to drive adoption of technology and embrace an innovative culture is critical. Choosing the right technology among so many choices is hard. 
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team. 

Overwhelmed with the number of available technology solutions? Deciding which technologies to adopt is among the biggest challenges for business leaders.

Software & Technology

Baker Tilly Digital

Analytics

Accelerate your digital transformation with AWS

Cloud Strategies

Connected Devices

Digital Enterprise

Digital | Labs

Emerging Technologies

Intelligent Automation

Technology overload: a guide to making smarter decisions

Video Nearly 60% of organizations with strategic plans struggle to execute, according to a Gartner Strategy Agenda Poll. During this on-demand webinar, you will learn about the basics of effective strategic growth planning, how to break through internal and external barriers, how to identify key gaps across the organization, and how to improve your chances of success.  Key objectives include: A framework for developing a strategic growth plan in a post-pandemic environment Lessons from the pandemic – how to address internal and external barriers to strategic growth How to create long-term sustainable value
Presenters Gary A. Plaster Jeffrey J. Vrabel  Dr. Mark Frigo, Director Emeritus of the Center for Strategy, Execution, and Valuation and the Strategic Risk Management Lab, Kellstadt Graduate School of Business at DePaul University in Chicago For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

Join Baker Tilly for an informative on-demand webinar on how to break through barriers to success with strategic growth planning.

Dual state residency can result in dual taxation

Using American Rescue Plan funds to procure consulting services

Prioritizing utility infrastructure spending: an analytical approach

Internal audit: understanding co-sourcing and outsourcing models

Technology overload: a guide to making smarter decisions

Break through barriers to success with strategic growth planning

Dual state residency can result in dual taxation