IRS to begin audits of personal, business use of corporate jets

The IRS will begin examinations of the use of corporate jets by large corporations, large partnerships, and high-income taxpayers to determine whether the business and personal use of the airplanes is reflected properly in their tax returns.

The approximately 10,000 corporate jets in the country often are valued in the tens of millions of dollars, and airplanes that are not used in commercial aviation or to carry freight can be depreciated over five years. The audits present “a significant opportunity to collect a significant amount of revenue,” IRS Commissioner Danny Werfel said Wednesday in a call with reporters.

The IRS is using data analytics to determine which aircraft to examine first, focusing on 36 to 48 jets beginning this spring, Werfel said. Based on those results, audits of corporate jets could increase, he said.

Use of a corporate jet generally must be allocated between business and personal use. Personal use of an airplane can affect the business’s eligibility to deduct costs related to the personal travel and can require income inclusion by the individual traveler. The IRS believes “there’s not enough effective, robust recordkeeping going on and there is systemic overstating of these business deductions, and that’s what we’re looking to tackle,” Werfel said.

IRS examiners will first focus on corporations and complex partnerships and then examine individuals as needed, he said.

Because of shrinking resources, the IRS had been unable to concentrate on examining complex areas such as corporate jet use until it began receiving funds from the Inflation Reduction Act of 2022, P.L. 117-169, Werfel said.

“Our audit weights have been anemic. And I believe that when we are not doing the requisite amount of audit, that does indeed increase the risk of noncompliance,” he said. “That’s what we’re focused on. We’re looking for spaces where we think tax noncompliance is proliferating. And our new efforts are trying to hold people accountable for what they owe. Too many of these groups are shielding their income.”

The IRS also is pursuing multimillion-dollar partnership balance sheet discrepancies and using artificial intelligence to ramp up audits of more than 75 of the largest partnerships.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.