IRS Crackdown on Personal Use of Corporate Aircraft Takes Off

he IRS announced it will use enforcement funds from the Inflation Reduction Act (PL 117-169) to initiate dozens of new audits focusing on tax noncompliance around personal usage of business aircraft by corporations, partnerships, and high-wealth individuals. (IR 2024-26, 2/21/2024)

“The IRS is concerned that the use of these jets isn’t being properly allocated between business and personal activities,” IRS Commissioner Danny Werfel told reporters February 21. “This means that we are concerned people are using business aircraft for personal use, and in turn, then taking the business deduction they may not be fully entitled to. Personal use of corporate jets and other aircraft by executives and others have personal and business tax implications.”

The commissioner later clarified that the number of audits will be around three to four dozen. Specifically, these new examinations will look for potential violations of:

• Code Sec. 280F qualified business use and business aircraft depreciation rules
• Reg §1.274-10 personal use disallowance rules for aircraft
• Reg §1.61-21 income inclusion rules for fringe benefits like air travel

“In general, the Tax Code passed by Congress allows a business deduction for expenses of maintaining an asset such as a corporate jet if that asset is utilized for a business purpose,” he explained. “However, the use of a company aircraft must be allocated between business use and personal use. This is a complex area of tax law and recordkeeping can be challenging.”

According to Werfel, the IRS will utilize “advanced analytics” to conduct these audits in an area he described as under-scrutinized over the last decade as the agency’s yearly budget shrunk. A Government Accountability Office (GAO) report submitted to the House Oversight Subcommittee in January examined the audit trends of individuals making over $500,000 from the period 2012-2022. The GAO found that on average, more additional taxes were recommended per returns of this group compared to taxpayers making less, but the IRS closed fewer audits of those above that income threshold.

“Additionally, we found that the highest income audits generally required the most hours per audit,” the GAO reported. “For audits closed in fiscal years 2012 to 2022, the highest income audits averaged about 44 hours per audit compared to about 22 hours per audit for other [high-income/high-wealth] audits. According to IRS officials, audits of the highest income returns require many more audit hours because they are generally more complex.” Before receiving the approximately $80 billion from the Inflation Reduction Act, the IRS advocated for funding to bring on and train additional audit staff to complete these longer examinations.

Reiterating points made last week during his appearance before the House Ways and Means Committee, the commissioner stressed that the IRS does not take the overall position that all big corporations and well-off individuals are noncompliant or are purposefully engaging in evasive behaviors. However, inflation bill resource spending is geared toward closing the tax gap by targeting the largest dollar amounts owed by the most compliance-risk prone taxpayers identified by the agency using updated data models.

A press release accompanying the announcement boasted that recent enforcement efforts are already bringing in revenue that may have otherwise gone uncollected. “For example, the IRS is continuing to pursue millionaires that have not paid hundreds of millions of dollars in tax debt,” it read.

“The IRS has already collected $482 million in ongoing efforts to recoup taxes owed by 1,600 millionaires with action continuing in this area. Elsewhere, the IRS is pursuing multi-million-dollar partnership balance sheet discrepancies, ramping up audits of more than 75 of the largest partnerships using artificial intelligence (AI) as well as other areas.”