Corporate Jet Industry Pushes Back on IRS Audit Campaign

Most companies that use jets in business spend a lot to make sure they comply with the tax code, making the IRS’s warning shot last week about stepped-up auditing of their use unlikely to touch most of those traveling on corporate aircraft, tax practitioners said.

This recent effort is a smaller part of the IRS’s larger push to crack down on wealthy individuals and companies that aren’t paying what they owe and lower the tax gap—or the difference between taxes paid and taxes owed—which currently sits at about $688 billion from the 2021 tax year.

But the agency is still updating its technology and hiring after decades of underfunding, leaving open the question of whether launching these complex audits is an effective way to bring in more tax dollars from an agency that is seen as chronically behind in its enforcement of private-sector tax avoidance.

Ryan DeMoor, head of aviation tax at software company MySky, said that private jets have an “image problem” and people suspect more abuse than there is. And the National Business Aviation Association in a statement called the effort an “audit in search of a problem.”

“The image being corporate jets are there for your fat cat executives going on vacation,” DeMoor said in an interview. “That is absolutely not the case.”

There’s an industry dedicated to understanding the intersection of aviation with the tax code, said Zafar Asghar, an attorney who owns a private aviation transaction consultancy.

“These guys know they have a target on their back,” said Asghar of wealthy clients. “Having a private jet invites further scrutiny. So why would they do anything wrong?”

Under the Microscope

There are 15,226 business jets in service in the US, according to aviation research company Jetnet. The prevalence and amount spent by S&P 500 companies on personal CEO trips has largely risen in the past few years. Jet spending in 2022 was $41.3 million, up from $22.3 million in 2011, according to ISS-Corporate, a Rockville, Md.-based provider of data and analytics to corporations.
The IRS will start three to four dozen new audits this spring, zeroing in on the abuse of corporate jets. Corporations and complex partnerships will be the first to face these audits, though the IRS said individuals could be audited, too.

IRS Commissioner Danny Werfel said initial audits will focus on where inappropriate deductions were made and where personal travel wasn’t logged as income.

Bonus depreciation is likely to be the most lucrative target, tax professionals said.

The 2017 tax law allowed companies, between 2018 and 2022, to deduct the full price of a corporate aircraft from their tax returns in the year it was purchased. Bonus depreciation is being phased out beginning in 2023, though the House-passed bipartisan tax package would restore 100% bonus depreciation through 2025.

A company could receive the full bonus depreciation amount by using the aircraft for business in the first year and maintaining at least half its use for business in following years. The tax deductions for the cost of the aircraft, rather than the cost of its upkeep, will be the highest-dollar area for the IRS to target.

Michael Kosnitzky, co-chair of private client and family office practice at Pillsbury Winthrop Shaw Pittman LLP, said the IRS will likely start its audits with recently purchased jets and family offices. The agency may steer away from public companies since most keep “pristine records” because of disclosure requirements and because most can afford to hire tax professionals who know their way around the tax code.

It will be easy for the IRS to identify taxpayers who aren’t keeping the records they’re required to, said Suzanne Meiners-Levy, who runs who runs a Florida-based boutique tax law firm that specializes in the tax of business aircraft.

“They don’t have a flight log or missing flights. They don’t list their passengers. They don’t have purposes. That’s all low-hanging fruit,” Meiners-Levy said, adding that complicated regulations make it harder for taxpayers to comply.

Layers of Complexity

Enforcement is just one piece of the puzzle, tax professionals said. Clear and updated regulations would help both the IRS enforce the tax code and give companies more certainty as they make business decisions, such as buying a corporate aircraft.

Werfel said complex record keeping was one reason behind the agency’s sluggish auditing in this area.

Companies that use corporate jets are required to track every passenger on every flight, why they are on that flight, and other details. The level of the person at the company on the plane will also add another layer of intricacy and there are different methodologies set out in rules that the taxpayer uses to help calculate their tax bill.

“If they’re an executive, if they’re an owner, or employee, they all have a different tax relationship to the aircraft,” Meiners-Levy said.

The IRS should reconsider some regulations in concert with the enforcement, said Michael Kaercher, a senior attorney adviser at the Tax Law Center at New York University. The regulations in their current form allow for taxpayers who report income to dramatically understate the value of personal flights, he said.

Meiners-Levy said her company spent over $1 million and several years programming their record-keeping system, and several thousand more to keep up with tax code changes. Meanwhile, at least prior to the infusion of tax-and-climate law funds, the IRS’s technology was behind, which made tracking compliance difficult.

“They will actually ask us to run it on our software and get the numbers back to them,” Meiners-Levy said.

The IRS said last week it is developing a database of corporate jet activity to help identify where it should audit.

“The publicity was more a, ‘Hey, get your house in order because it’s coming,’ and hopefully that spurs compliance for those who aren’t complying right now,” DeMoor said.