A new audit campaign by the IRS will investigate the potential misuse of corporate jets by large businesses and wealthy individuals, the latest move in a broader effort to identify areas of high-income noncompliance.
The initiative, announced in a February 21 release, will begin later this spring and consist of three to four dozen audits. But according to IRS Commissioner Daniel Werfel, the effort may be expanded in the future depending on how those audits play out.
“It’s a complex area where IRS work has been stretched thin,” thanks to a decade of budget cuts at the agency, Werfel told reporters that same day. “These aircraft audits will help ensure high-income groups aren’t flying under the radar.”
When it comes to corporate jet use, the IRS suspects there may be noncompliance in two respects: failure by a business to exclude personal travel from deductions, and failure to report personal travel on a business aircraft as income.
How much revenue is at stake remains to be seen, but Werfel said that there are about 10,000 corporate jets operating in the United States, which are often valued at tens of millions of dollars. And because the value of most of these aircraft can be deducted within the first five years, the deduction on a given return for that aircraft’s travel is often likewise in the tens of millions of dollars.
“That’s why it’s so important that we get this right,” Werfel added.
Along with enforcement, Werfel says the initiative has an educational component: As the IRS conducts these audits and identifies recurring issues, it plans to develop educational materials — like do’s and don’ts — for businesses’ corporate jet use and recordkeeping.
Choose Your Flight
Like many of the IRS’s recent high-income compliance initiatives, Werfel emphasized that the use of technology to aid the audit process was a critical component.
Werfel was vague about how exactly the IRS was using data analytics to aid its audit efforts, but he did let on that it has access to data on corporate jet activity. The IRS is then “applying sophisticated data science to that data,” which will be used to identify higher risks of noncompliance, he said.
“We want to make sure we’re selecting the right cases,” Werfel added.
Case selection is a critical area for the IRS. A recent Government Accountability Office report evaluating the early results of a pair of recent IRS initiatives to audit high-income taxpayers found that the audits concluded thus far had resulted in high no-change rates. The report noted, however, that the early results may not be representative.
Michael Kaercher of the Tax Law Center at New York University School of Law said that in scrutinizing corporate jet use, the IRS may find some low-hanging fruit. Recurring flights between an executive’s workplace and a known vacation destination “may be a good flag,” he suggested, and where there’s a pattern of noncompliance, “the adjustments could be substantial.”
Kaercher noted, for example, that IRS regulations allow taxpayers to... to read more please subscribe to NovaTax.
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