Don't Mess With Taxes

The IRS is OK with celebrating the closing of a business deal on a corporate jet, but not so accepting when the aircraft is used for personal jaunts. (Unsplash+ in collaboration with Getty Images)

If Elon Musk and Taylor Swift were unhappy with the attention their jet flights were getting from a private citizen, a federal agency's plans could cause them even more turbulence.

The Internal Revenue Service today announced that it is initiating dozens of audits on business aircraft that were used for personal travel.

The audits will focus on aircraft usage by large corporations, large partnerships, and high-income taxpayers. Specifically, the IRS wants to ensure that, for tax purposes, the jets' use is being properly allocated between business and personal reasons.

The IRS says this particular area has not been closely scrutinized during the past decade because — wait for it — the agency faced budget issues.

But thanks to added Inflation Reduction Act funds, the IRS says it will be using advanced analytics and other resources to more closely examine the taxes related to these aircraft.

Personal vs. business flights: "Personal use of corporate jets and other aircraft by executives and others have tax implications, and it's a complex area where IRS work has been stretched thin," said IRS Commissioner Danny Werfel. "With expanded resources, IRS work in this area will take off. These aircraft audits will help ensure high-income groups aren't flying under the radar with their tax responsibilities."

It also is a way to bring in "a significant amount of revenue," said Werfel in a call with reporters. "What we believe is happening is there's not enough robust record-keeping going on, and there is systemic overstating of these business deductions."

This business aircraft sector was chosen, says the IRS, because the planes are often used for both business and personal reasons by officers, executives, other employees, shareholders, and partners.

In general, the Internal Revenue Code allows a business deduction for expenses of maintaining an asset, such as a corporate jet, if that asset is utilized for a business purpose. However, the use of a company aircraft must be allocated between business use and personal use.

Personal travel could affect the business' eligibility to deduct costs related to those air miles. And the person using the plane for a personal jaunt should have that travel value reported as taxable income.

The IRS plans to start with three to four dozen audits of large corporations and partnerships that have business jets. Depending on those findings, as well as the hiring of additional examiners, audits of high-income individuals likely will follow.

Other high-dollar exam areas: Officially, the corporate jet usage focus is part of the IRS Large Business and International division's campaign program. Campaigns apply different compliance streams to help address areas with a high risk of non-compliance.

It's also the latest in IRS efforts to improve tax compliance in complex, overlooked high-dollar areas where the agency previously did not have adequate resources.

Earlier, the IRS launched pursuit of 1,600 millionaires it says have not paid hundreds of millions of dollars in tax. So far, the IRS has collected $482 million in this area.

The IRS also is looking into multi-million-dollar partnership balance sheet discrepancies. This effort includes ramping up audits, in part by using artificial intelligence (AI), of more than 75 of the country's largest partnerships.

In addition to collecting tax dollars that are due, Werfel noted that the aircraft and other audits will help ensure that everyone is following the tax law.

"The IRS continues to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act," Werfel said.

As staff and technology are added to ensure that the highest-income taxpayers pay what is legally owed Uncle Sam, Werfel promised that "the IRS will have more announcements to make in this important area."

You also might find these items of interest:

• Tax Gap grows to $688 billion per latest IRS calculations
• AI will be part of expansive IRS crackdown on wealthy, corporate tax evaders
• A global wealth tax on billionaires would bring in $250B a year, says EU tax group

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