IRS Begins Audits of Corporate Jet Usage

On February 21, 2024, the Internal Revenue Service (IRS) announced that it plans to conduct “dozens of audits on business aircraft involving personal use” throughout the year. Citing the IRS’ additional funding under the Inflation Reduction Act, the News Release quotes IRS Commissioner Danney Werfel as stating: “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.” With this in mind, corporate executives and others who have concerns should consult with an experienced Texas business tax attorney promptly.

As the News Release goes on to explain, the IRS’ focus on personal use of corporate jets in 2024 is part of a larger effort to target big companies and high-income individuals. Acknowledging that previous budget cuts had impeded the IRS’s efforts to effectively conduct enforcement efforts in this area, the News Releases states that the IRS is “now taking swift and aggressive action to close this gap.”

The IRS’ Efforts to Examine and Enforce Tax Compliance Regarding Personal Use of Corporate Jets

Similar to other types of business assets, expenses related to the operation of a corporate jet are only deductible when the jet is being used for business purposes. If an executive or other individual is permitted to use a corporate jet for non-business purposes (i.e., to take a family vacation), not only is this use is not tax-deductible, but it can also have tax implications for the executive or other individual who receives free use of the jet.

While the IRS’ News Release indicates that the agency is currently planning dozens of business aircraft-related audits, it also notes that the number of these audits may rise:

“The audits will be focused on aircraft usage by large corporations, large partnerships and high-income taxpayers and whether for tax purposes the use of jets is being properly allocated between business and personal reasons.

“The IRS will be using advanced analytics and resources from the Inflation Reduction Act to more closely examine this area . . . . The number of audits related to aircraft usage could increase in the future following initial results and as the IRS continues hiring additional examiners.”

In a statement announcing the IRS’ auditing initiative, Werfel acknowledged that “the amount of the deduction for aircraft travel can be in the tens of millions of dollars.” The IRS’ concern is that, in many cases, a significant portion of this deduction is fraudulent. By both uncovering fraudulent deductions and ensuring that executives pay any tax owed as a result of their personal use of corporate jets, the IRS is seeking big wins that help to reduce the tax gap more efficiently than pursuing a higher volume of audits targeting lower-income taxpayers.

The IRS’ Broader Efforts to Target High-Income Taxpayers in 2024

It is this opportunity that is underpinning the IRS’s broader efforts to target high-income taxpayers in 2024. In January of this year, the IRS announced that it intends to use its additional funding received under the Inflation Reduction Act “to expand enforcement efforts related to high-income individuals, large corporations and complex partnerships.” This includes not only targeting improper reporting of personal use of corporate jets, but targeting numerous other forms of high-income tax evasion and tax fraud as well.

As identified in the IRS’s January 12, 2024 News Release, some of its enforcement priorities for year ahead include:

• Taxpayers With More than $1 Million in Income and $250,000 in Recognized Tax Debt – The IRS’ News Release indicates that the agency is focusing on auditing high-income individuals who have at least $1 million in income and $250,000 in recognized tax debt. An initial round of audits targeting taxpayers in this category resulted in $482 million in additional tax revenue.
• Partnerships with Ongoing Balance Sheet Discrepancies – The IRS’ News Release states that the agency, “has identified ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets, which is an indicator of potential non-compliance.” This includes, but is not limited to, discrepancies between partnerships’ end-of-year balances and their beginning balances in the following year.
• U.S. Subsidiaries of Foreign Companies – The IRS is also placing particular emphasis on enforcing compliance among U.S. subsidiaries of foreign companies. This includes specifically U.S. subsidiaries that distribute products domestically “and do not pay their fair share of tax on the profit they earn [from] their U.S. activity.”
• Corporate Taxpayers Covered Under the IRS’s Large Corporate Compliance Program – The IRS’ Large Corporate Compliance (LCC) program focuses on ensuring tax compliance among the country’s largest corporate taxpayers—which currently include those with average taxable income of at least $526 million per year. According to the IRS’ News Release, the agency plans on conducting additional audits under the LCC program in 2024 after onboarding additional examiners using its Inflation Reduction Act funding.
• Partners Covered Under the Self-Employment Contributions Act (SECA) – In 2024, the IRS is also focusing on ensuring that “taxes are being properly reported and paid by wealthy individual partners who provide services and have inappropriately claimed to qualify as ‘limited partners’ in state law limited partnerships.” As the IRS goes on to clarify, partners who actively participate in a partnership’s operations (including a limited partnership’s operations), “must report their partnership share as net earnings from self-employment subject to SECA tax.”

These are just examples. From personal use of corporate jets to failure to report partnership income and revenue from domestic sales, the IRS is cracking down on all forms of high-income tax evasion and tax fraud in 2024. High-income individuals and corporate executives who have concerns should consult with an experienced Texas business tax attorney promptly, and those that are being targeted in audits and investigations should engage experienced defense counsel immediately.

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At Brown Tax, P.C., our practice is devoted to representing high-income taxpayers in complex federal tax controversies. To request a confidential consultation with an experienced Texas business tax attorney, please call 888-870-0025 or tell us how we can reach you online today.