Tax evasion penalties, especially when moving out of state
Attempting to evade state taxes by moving to a state with no income tax does not automatically exempt you from your prior state's tax obligations.
Here's why and what you need to consider:
1. Residency Audits
- High-tax states are vigilant: States like California, New York, and Illinois actively conduct residency audits to ensure people aren't simply moving to avoid their tax responsibilities.
- Burden of Proof: In a residency audit, the responsibility lies with you to prove that you have legitimately changed your domicile and intend to make your new state your permanent home.
- Factors Considered: Auditors look at objective factors to determine residency, such as:
- Time spent in each state
- Location of your primary residence, according to Forbes
- Location of your bank accounts and financial institutions
- Voter registration and where you vote
- Driver's license and vehicle registration
- Establishing memberships in professional organizations or clubs in your new state
- Selecting doctors, accountants, or lawyers in your new location
2. Continuing Obligations
- Source of Income: Even if you establish residency in a new state, you may still owe taxes to the state where you previously resided if you continue to derive income from sources within that state.
- Federal Offset Program: States can refer tax debt to the Federal Offset Program, which allows them to intercept federal tax refunds or garnish wages to recover owed taxes.
3. Penalties for tax evasion
- Civil Penalties: States can impose substantial civil penalties, including large fines and interest on unpaid taxes.
- Criminal Charges: Depending on the severity of the evasion and intent to defraud, you could face criminal charges, including:
- Fines up to $100,000 for individuals, $500,000 for corporations.
- Prison sentences ranging from several months to five years, or more in some cases.
- Probation and community service.
- Liens and Seizure: States can place liens on your property, both real estate and personal, to secure payment of outstanding tax debts. They may also seize and sell your property to satisfy the debt.
- Reputational Damage: A tax evasion conviction can result in a criminal record, which can negatively impact future employment opportunities and personal reputation.
4. Statute of Limitations
- State vs. Federal: The statute of limitations for state tax audits and collections can differ from federal timelines.
- Fraudulent Returns: In cases of fraud, the statute of limitations may not apply, allowing the state to audit and collect taxes indefinitely.
Important Note: This information provides general guidance. Tax laws are complex and vary by state. If you have concerns about your state tax obligations, it's crucial to seek professional advice from a qualified tax attorney or accountant to ensure compliance and avoid potential legal consequence
