Private Aircraft InteriorIn a recent news release, the IRS announced plans to begin “dozens” of audits on aircraft use by large corporations and high-income taxpayers to determine whether expenses for private aircraft are being properly allocated between business and personal use. “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. 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,” said IRS Commissioner Danny Werfel.

The IRS said that it will use “advanced analytics” and additional funding provided under the “Inflation Reduction Act” to pursue these audits. It is unclear what analytical resources the IRS will use, but they may include review of SEC periodic reports by public companies that disclose aircraft use. Could the IRS also be monitoring social media posts for private aircraft use, or FAA records on aircraft movements (which are easily obtainable under the Freedom of Information Act). The number of aircraft audits could be expanded depending on the results of the initial audits.

The IRS admits in the release that “this is a complex area of tax law, and record-keeping can be challenging.” Aviation attorneys and accountants that practice in this area know this all too well. The National Business Aviation Association publishes its own Personal Use of Business Aircraft Handbook, covering the income-tax rules relating to personal use—that runs 44 pages and includes 214 footnotes. (Members of NBAA get free access to this valuable resource.)

In a recent NBAA webinar discussing this IRS announcement, practitioners in this area generally agree that there is not a widespread compliance problem among taxpayers. Many taxpayers already engage specialists familiar with these complex rules and are making good efforts to comply. Practitioners generally do not expect the initial audits to uncover any widespread or significant non-compliance.

However, taxpayers can ensure that they are prepared for audits by engaging with an experienced aviation tax attorney or accountant to review the rules, and reviewing their flight record-keeping to see whether there is room for improvement. Promptly after the end of each trip on a private aircraft, taxpayers should collect information on the identity of each passenger on board, their primary activities at each destination, and whether those activities were for personal, entertainment or business purposes. Adequate and contemporaneous documentation is a major requirement to avoid disallowance of deductions—and assessment of back taxes, interest and penalties—by the IRS.

The information in this article is intended to highlight potential issues with aircraft ownership and operations and is therefore general in nature.  Please feel free to contact one of our experienced aviation attorneys directly to discuss your specific business/personal needs.