United States: Another (!) Note On Cell Phone Records

Last year we published a full-length article in State Tax Notes that discussed the importance of cell phone records in residency audits and did a deeper dive on some of the issues we've seen come up in reviewing various cell phone records in these audits. Here is a link to that article:  https://www.hodgsonruss.com/assets/htmldocuments/2019stn16-4.pdf   

Over the last year, we have uncovered some additional information about some of the issues highlighted in our article, and we have identified some new issues too, specifically with respect to records produced by AT&T. Taxpayers who are under audit (or who are expecting a residency audit) and representatives who handle these audits for taxpayers need to be aware of these issues as they analyze cell phone records as part of the day count review process. Here are some of the issues we are seeing:

• Data trailing. Data trailing happens when an application on your cell phone continues to distribute a GPS address without confirming the cell phone's location with the network. It often happens when the phone is out of reach from a signal. On the AT&T records, this will show as data activity. It is generally pretty easy to spot, because the location entries will repeat in regular intervals—i.e., 12:05pm, 1:05pm, 2:05pm, etc.—even if other records show the person is on the move. When can this happen? Imagine a cell phone user is in New York City, but travels to the airport and hops on a flight to Florida.  The phone will continue to register his location, so long as it can access a tower. However, once in high enough altitude, it will no longer update. How do you spot this?  On the reports AT&T generates in these audits, there a columns that reflect "bytes up" and "bytes down" in data usage. If those two columns both have zeros, it indicates that the cell phone application has neither submitted nor received information across the network. For most taxpayers, having records placing them in New York minutes before Florida, isn't a concern. They have documented their travel outside of the State. Where it becomes problematic is for people who travel late at night or very early in the morning, where this trailing could suggest the taxpayer was in New York on a day they were not. It could also cause issues for high income wage earners, trying to use their cell phone to support a work-day allocation. So, in audits, this is just something to flag on the records as a "false positive" indication of a taxpayer's physical presence. Note that seeing regular intervals of data are not in and of themselves concerning. But with normal use, there should be random data between those intervals- i.e. 12:05pm, 12:12pm, 12:37pm, 1:05pm.
• Call forwarding. There are two types of call forwarding, to voicemail and to another phone number. Voicemail call forwarding is a normal part of every user's account. On Verizon Wireless statements, it's easy to identify, and clearly labeled as voicemail. However, on AT&T accounts it's less so. These calls appear to be forwarded to another phone number, when they are actually voicemail call center numbers. If you have access to Westlaw or LexisNexis, you can verify this, as these numbers have never been assigned to a third party. For the most part, call forwarding to voicemail doesn't present issues on audit.
  
  However, call forwarding to a second phone number, has been known to cause its fair share of headaches for taxpayers and practitioners alike. So users who regularly use this feature on their cell phones, should be aware of the issues it can create. On some Verizon plans, you may not even be able to identify this type of call forwarding. This is because for call forwarding, the origination detail shows the city and state related to the user's area code, and has no relationship to where the user of the cell phone is physically located. Since many Verizon unlimited plans no longer feature the "usage type" column on billing statements, if the area code of the user's phone is somewhat close to their physical location, it becomes impossible to identify where they are. Probably best to explain this one through an example- let's look at it from the perspective of a taxpayer with a 917 area code (New York, NY).  If they are a Floridian, the call forwarding will be apparent. You will see calls in both Florida and New York throughout the day, signaling the use of call forwarding. However, if the taxpayer was a New Jersey resident, and the calls are bouncing back and forth between both states throughout the day, you may not be able to differentiate call forwarding at all. We have had entire cases where the best course of action in this situation, was to simply disregard the cell phone records entirely.
  
  For both AT&T and Verizon, you should see call forwarding used sporadically, when the user cannot at that moment answer. Always be wary of records that show call forwarding to another phone, if there are several hours or days' worth of call forwarding with no other activity. It would benefit you, and your client, to do proper due diligence that the number is not in the name of the taxpayer (or spouse) on another account or network. Department auditors have a keen eye for looking out for taxpayers who are attempting to use their cell phone to fraudulently create a day count record. In short, cell phone users should be cognizant of these issues. It's probably okay to forward your cell phone to someone else (an assistant or a spouse) when there is a specific and compelling need to do so.  However, those at risk of audit should probably not use call forwarding regularly. 
• Old Phones. In audits of very recent years (2017-current), the type of cell phone used may matter. Why? A client using an iPhone 5 or 6 in 2020 is running on old technology. Since those phones were released, cell phone companies have switched from 3G to 4G, and most recently to 5G. Using a 3G phone on a 5G network is kind of like using rabbit ears on your TV to get cable. The use of old phones on new networks should not impact the location detail for voice calling, but it can greatly impact the location detail for the data component. If a client used an old phone on an AT&T account for an entire audit period, this may require setting aside the data usage in the AT&T records. If you can isolate when the client got a new phone during an audit period, you can use the data activity after that point.
• AT&T Microcell. In a recent audit case, we discovered that AT&T records registered a client's location as New York City when that client was sitting at his Florida home and using his cell phone. As the client got further away from his Florida home, the Florida cell tower location information became reliable. It was only when he was at his Florida home where there was an issue. Ultimately, we determined the cause of this "false positive" New York City activity was a portable cell site, called a microcell. A microcell is a small mobile phone base station connected to the phone network via the internet. It is typically used to improve mobile phone reception within a particular area. When this client purchased his microcell, he registered it to the address of his old New York City apartment. When he moved to Florida, he took the microcell with him and installed it in his Florida home, but did not change its registration location. Clearly, our client who was sitting at his Florida home could not actually "ping" a New York City cell tower. This was our first clue. The second clue was that the location detail on the AT&T report returned the client's exact former New York City residential address. A regular cell site will almost never be someone's home address. A microcell will. Here, the fix was easy. Our client updated the address of the microcell to show its actual location—his home in Florida.
• A note on subpoenas. AT&T records can generally be obtained with a signed and notarized authorization for the records from the accountholder or custodian of the account. When the Tax Department issues a subpoena to AT&T, the subpoena must be accompanied by this release as well. However, a request from a customer with just an authorization will not return location detail for incoming voice or SMS activity. A Department-issued subpoena to AT&T with the authorization will return the incoming voice and SMS activity. This additional activity can often help determine a client's physical location, especially if the other activity is minimal or shows some of the other issues discussed above.
• A general point about accuracy. When looking at cell phone records, randomness is the key to accuracy. An individual cannot control where their cell signal goes under normal circumstances. So you should generally not see an entire day of AT&T activity where a phone is either producing a GPS signal only on regular 30 or 60-minute intervals (data trailing), or showing only one cell site location.  In the latter situation, it could be an indication that the client left their phone in the same place all day, even if she was otherwise on the move. These accuracy-related issues are part of nearly all normal AT&T records. However, if they exist in isolation, with no other randomized records (especially voice or SMS), this could be a sign of a problem. Of course, it could also indicate that the client spent an entire Sunday at home with his phone on the kitchen counter. So, these issues have to be examined carefully to determine the reliability of the location detail.
• Practitioners beware. One of the last things, in addition to call forwarding and physical location, a user can control is whether or not their phone is turned on. So what do we look out for here? It's reasonable for someone to turn off their phone when boarding a flight. It's also reasonable for a phone to die from low battery, or from being broken. There are also certain exceptions to consider if it's turned off for religious observances. However, a Connecticut resident, who's a diehard Mets fan, should not have a phone "die" between 1-8 pm on the days the Mets play at home. While some taxpayers may think this is clever, and that a few hours over the course of a 365-day period isn't significant, it can be glaringly obvious from their cell phone records what has transpired. So we want to reiterate- it is never acceptable to advise a client to turn off their phone, or leave their phone at home, while in New York. If a taxpayer has knowingly and willingly turned off their cell phone, knowing those records are to subsequently be used in an audit, in an effort to evade or avoid paying New York taxes, they have committed tax fraud. Civil tax audits can be difficult, long, and costly processes for taxpayers, but they pale in comparison to what a criminal tax audit brings.

As cell phone records have become the go-to third-party source of day count proof in residency audits, understanding these records has been key to successfully defending clients in those audits. We've learned a lot along the way and try to impart that knowledge to all of our faithful readers as often as we can. However, we routinely discover new issues or refine our thinking around these records, so there is really no substitute for a quick telephone call to one of us if you see these types of cell phone issues in an audit. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.