A number of ASCPA members have mentioned recently, and we've also noticed, a major uptick in the number of so-called "residency audits" conducted by the Alabama Department of Revenue (ADOR). The Alabama Tax Tribunal has issued a number of rulings on this issue in the past few years as well. Often these audits result from the taxpayer having filed a federal income tax return listing an Alabama address, while not having filed an Alabama return. The ADOR receives notice of this discrepancy through its exchange of information agreement with the IRS.

Some  of  our  readers  suggested that  we  outline  the  key  criteria to  be  followed  by  an  Alabama resident  who  wishes  to  change  his or  her  domicile  to  another  state  or another  country.  For  Alabama  tax purposes,  "domicile"  is  defined  as "an  individual's  true,  fixed  home  to which  he  intends  to  return  when absent."  Nonetheless,  as  Chief Tax  Tribunal  Judge  Bill  Thompson has  noted  on  numerous  occasions: "[t]here  are  [no]  hard  rules  for determining  if a  person  is  domiciled in  Alabama."  Thus,  it's  a  highly  fact­ sensitive  determination,  mixed with  some  relatively  consistent return  filing  tips  outlined  below. There  is  no  "one  size  fits  all." 

In  general,  Alabama  residents include  those  individuals  who (1)  have  domicile  in  Alabama, (2)  maintain  a  place  of  abode  in Alabama,  or  (3)  spend  more  than seven  months  during  the  tax  year  in Alabama.  Ala.  Code  §  40-18-2(b). In  order  for a taxpayer  to change  his domicile  from  Alabama  to another state,  "a  taxpayer  must  abandon Alabama,  and  also  establish  a new  domicile  elsewhere  with  the intent  to  remain  permanently,  or at  least  indefinitely."  Canady  v. State  Dep't  of  Rev.,  Admin.  Law Div.,  Dkt.  No.  INC.  14-445  (Aug. 15,  2014).  And "[a]  person's  intent will  be  ascertained  by  examining his actions."  ADOR Rule  810-3-2- .01(1)(b)(1)(i)

A  textbook  case  is  Boudreaux  v. State  Dep't  of  Rev.,  Admin.  Law Div.,  Dkt.  No.  INC.  07-848  (Apr. 15,  2008),  where  the  taxpayer moved  to  the  U.S.  Virgin  Islands for  business  reasons,  while  his wife  and  children  continued  to  live at  their  old  residence  in Alabama. However,  the taxpayer  moved  back to  Alabama  after  only  two  years because  his  business  opportunities had  effectively  been foreclosed  by governmental  changes beyond  his control.  Judge  Thompson  stated that  the  taxpayer's  "purchase of  and  active  involvement  in running  the  businesses  shows that  he  intended  to  live  and work on  the  Islands  for  an  extended  or indefinite  period.  The  fact  that he  purchased  a  place  to  live  on the  Islands  further  evidences  his claim  that  he  intended  to  remain indefinitely.  The  Taxpayer  also purchased  a  vehicle  and  obtained a  Virgin  Islands  driver's  license. He  registered  to  vote  and  filed federal  tax  returns  as  a  resident of the  Islands.  Importantly,  he put his  oldest  child  on  a  waiting  list at  a  private  school  on  the  Islands "  Id.  Thus,  the  taxpayer's actions,  when  considered  with his  testimony,  "show  that  [he] intended  to  live  in  the  Virgin Islands  indefinitely  when he moved there."  Id. 

We have also  found  it  helpful  if the taxpayer  files  an  Alabama  income tax  return  for  the  year  prior  to moving  labeled  "Final  Return"  and attaches  a  statement  of  intent  to abandon  Alabama  domicile  as suggested  by ADOR  Rule  810-3-2- .01(4).  Other  practical  indicia  of an intent  to  change  domicile  include such  things  as: 

•  purchasing  a  home  or signing  a long-term  lease  on  an  apartment in  the  new city; 

• selling  the  Alabama  residence  or listing  it for sale; 

• notifying  the  county  tax  assessor to  remove  the  Alabama homestead  exemption  from  the Alabama  residence  if  the  client intends  to  keep  the  [former] residence; 

•  filing state  or  local  tax  returns with  the  new  state or locality (if required); 

•  listing the new state address on the  federal income tax return (and other  documents); 

•  obtaining a driver's license in the new state; 

•  purchasing a new car tag;

• registering to vote in the new state

•  opening  a  bank  account  in  thenew city and having paychecks deposited into that account; 

•  obtaining  professional  licenses and  joining  professional  groups in  the  new  state; 

•  joining  a  local  country  club, health  club,  church  or  other civic  organization  (e.g.,  the  local Kiwanis or Rotary Club);  and 

•  enrolling  children  (if  applicable) in  school  in  the  new city. 

We  have  handled  appeals  in which  it  was  helpful  to  show that  the  taxpayer  changed  his estate  planning  documents  to be  governed  by  the  new  state's probate  laws.  We  have  also found that  affidavits  from  co-workers  or supervisors  at  the  new  workplace were  useful.  Conversely,  frequent return  trips  to  Alabama  to  visit loved  ones  (e.g.,  the  spouse  or other  family  members)  tend  to show an intent  not to  permanently abandon  the  state,  especially  since spouses  are presumed  to  have  the same  domicile. 

The  suggestions  in  this  article  are by  no  means  intended  to  be  an exhaustive  checklist,  and  we  also realize  that  few  taxpayers  can check each  one of these  boxes.  But it's important  for  your client  to take proactive  measures  upon  deciding to  move  away  from  Alabama. Taxpayers  bear  the burden  of proof if  the  ADOR  initiates  a  residency challenge,  and  according  to  RIA Checkpoint,  the  ADOR  "takes  a very  aggressive  position  on  the domicile  issue ...  "  So,  before  your clients  move,  be  sure  to  talk  to them  about  the  importance  of taking  (and  documenting)  as  many of these  steps  as  possible. 

Republished with permission. This article was first published in the September/October 2016 issue of Alabama Society of CPA's "Connections".