March 30, 2023
Summary
The New York State (NYS) Department of Taxation and Finance (Department) has begun issuing audit notices to employers for the 2020 through 2022 tax years for state and city income tax withholding and Metropolitan Commuter Transportation Mobility Tax (MCTMT). Given the recent activity and informal conversations we’ve had with the Tax Department, NYS has renewed its focus on remote workers. We have already seen additional scrutiny on remote workers via personal income tax return reviews or audits for the 2020 and 2021 tax years and expect NYS to continue its detailed review at a larger scale on NYS employer withholding tax audits.
The Detail
Since the issuance of withholding tax field audit guidelines in 2015 by the NYS Department, which was part of an initiative to ensure conformity and consistency in the withholding tax audit process and improve compliance among non-resident non-filers, NYS has routinely audited NYS employers. NYS’ approach has been to focus its audit review on employers rather than employees in order to cast a wider net in seeking tax revenue. NYS has leveraged the threat of penalties to increase employers’ level of compliance with withholding tax reporting requirements for wages earned in the State.
With the recent shift to remote work arrangements, we have seen NYS question individuals when seeking refunds on their personal income tax return for NYS tax withheld and reported on their Form W-2. Under NYS’ “Convenience of the Employer rule” and personal income tax guidance issued during COVID-19 by means of FAQs, NYS provided that non-resident employees assigned to a NYS work location and telecommuting from outside NYS for the employee’s convenience rather than the necessity of the employer are still subject to NYS taxes unless their employer had established a bona fide employer office at their telecommuting location.
With the commencement of audit notices being issued for the 2020 through 2022 tax years, we anticipate that NYS will renew its focus on remote workers and scrutinize employees that previously had a NYS work location which has now shifted elsewhere. Since a NYS withholding and MCTMT tax audit encompasses all employees paid out of the legal entity selected for audit and not just NYS employees, NYS can easily identify changes in employee work locations or those who had NYS wages previously reported to inquire about such changes. The electronic payroll data requested for an employer’s workforce includes a field for “Telecommuting Indicator” and the pre-audit questionnaire (NYS Withholding Tax TAA Field Audit Questionnaire (22 questions)) requires the employer to respond to a series of questions including whether the employer maintains work from home employees or telecommuters, to which office or work location remote work employees report into or which cost center the employees are associated with, and if NYS taxes were withheld. The burden of proof is placed on the employer to substantiate that NYS tax was properly withheld and timely remitted to the State.
Other areas NYS has traditionally focused its employer withholding audit review include short term business travel and multi-year compensation elements and we expect the focus in these areas to continue. With respect to short term business travellers, NYS requests travel and expense records or office badge swipes for non-NYS based non-resident employees earning greater than $500,000 in federal taxable wages to determine whether any employees have exceeded 14 work days in the state. For multi-year compensation such as bonus, equity and deferred compensation payments, NYS will review employees that were previously assigned to a NYS work location in any of the previous five years but are no longer in NYS to determine whether they received wages earned in a prior year while working in NYS. The audit also covers NYS and NYC resident employees with under withheld tax as well as employees who have claimed more than 14 exemptions on Federal Form W-4 or NYS Form IT-2104. We have seen all of these areas result in significant liabilities for employers.
NYS generally selects a sample year within the audit period and the results from the sample year will be extrapolated to the remaining audit years. Employers should take this into consideration when selecting a sample year as any significant events impacting the payroll such as an upgrade or change to the payroll system, acquisition or merger, or years with large number of employee transfers in/out of NYS, significant equity events, or large-scale payroll adjustments could skew the audit results.
How we can help
Vialto’s Employment and Payroll Tax Controversy Team offers assistance with federal, state, and local withholding and unemployment audit defense. Many of our professionals are former tax auditors, tax attorneys and supervisors who have the knowledge and professional insights to achieve successful results on these audits. Our team has over 15 years of experience in managing NYS withholding tax audits, is well versed in the NYS audit process, and maintains strong relationships with NYS auditors.
Contact us
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
• Tina Schrob, Partner | cristina.g.schrob@vialto.com
• Greg Fetter, Partner | gregory.fetter@vialto.com
• Ligeia Donis, Partner | ligeia.m.donis@vialto.com
• Jessica Castro, Director | Jessica.j.castro.acevedo@vialto.com
Further information on Vialto Partners can be found here: www.vialtopartners.com
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