The Internal Revenue Service recently announced a campaign to investigate the use of corporate jets by large businesses and wealthy individuals. Although the announcement was made on Feb. 21, 2024, the campaign is part of a larger effort by the IRS to increase its scrutiny of high-income taxpayers and large businesses to help close the tax gap.
"It's part of the larger IRS campaign," said Zeinat Zughayer, tax controversy manager at Top 100 Firm Baker Tilly.
The IRS has already collected $482 million after completing audits of 1,600 wealthy individuals as part of its continuing efforts aim to ensure that "high-income groups aren't flying under the radar" with their tax responsibilities.
The agency's examinations of corporate aircraft typically surround three issues, according to Zughayer:
- Whether the taxpayer qualified for bonus depreciation;
- Whether the taxpayer has substantiated the business deduction; and,
- Whether the taxpayer has properly imputed income and/or properly calculated the depreciation disallowance for personal use.
"The use of corporate aircrafts by large businesses and high-net-worth individuals has always been an audit risk that we identify when advising clients," Zughayer said. "We've learned that the IRS tends to focus on the classification of the flight, whether it's business or personal, and then how they're accounting for the deduction of business expenses or disallowing a portion of those expenses to account for personal usage. We need to substantiate the use of the aircraft to ensure that the business reason is properly documented, and then make sure that we're properly imputing income or calculating the disallowance for personal usage."
Zughayer indicated that while there is increased scrutiny of deductions, the rules themselves haven't changed. "The fact that it's getting more attention is part of the larger effort regarding high-net-worth individuals and large-business exams," she said. "And the IRS has seen an increase in these deductions post-COVID, with more and more people deciding to purchase a corporate aircraft for their business rather than flying on commercial aircraft."
Zughayer advises clients who purchase corporate jets to put best practices in place right from the beginning.
"A lot of our clients now purchase flight log software to help document the business purpose of the flight, who's on the flight, the destination and when they're leaving, and then also taking it a step further from past exam experience," she said. "We've learned that the flight log itself isn't enough on its own. You usually need to provide further documentation, for example, an email confirming the meeting. I've had IRS agents ask me to provide a copy of the pamphlet from a conference that the client was attending. Make sure that three years from now, if they're under audit, that you have the backup documentation already prepared."
Another reason the issue has become a hot topic, according to Zughayer, is that a number of progressive senators wrote to Treasury Secretary Janet Yellen and IRS Commissioner Danny Werfel praising the fact that the IRS is "increasing audits of corporate jet usage and cracking down on any executives who are illegally excluding income related to personal trips."
The letter, dated March 10, 2024, is signed by Senators Elizabeth Warren, Ron Wyden, Bernie Sanders, Sheldon Whitehouse, Chris Van Hollen and Edward Markey, all Democrats.
"Again, we appreciate the IRS's commitment to using new funding to make our Tax Code fairer, including the recent announcement of audits of wealthy taxpayers who claim millions in deductions for their use of corporate jets," the senators wrote. "As the agency moves forward with these audits, we urge you also to pursue rulemaking to properly close the [standard industry fare level] loophole that allows ultra-wealthy taxpayers to avoid tax on personal trips."
