Viewpoint: IRS Private Jet Audits May Provide Lessons For Europe

In late February 2024, the IRS announced plans to audit dozens of high-net-worth individuals. While many taxpayers have braced for impact, some aviation tax experts say this is part of a plan to shake down high-income taxpayers for public perception.

As part of the funding received from the Inflation Reduction Act in August 2022, the IRS was able to hire additional specialized agents tasked with examining aircraft compliance as part of the agency’s commitment to ensuring fairness in tax administration.

Inefficiency Could Mean Improper Classification

The IRS is targeting large corporations, large partnerships, and high-income taxpayers to determine whether they are properly classifying business flights and passengers on corporate aircraft for tax deductions.

The tax code passed by Congress allows business deductions for expenses to maintain a company’s assets if they are for business purposes. However, personal use of a company’s assets impacts the eligibility of that deduction. For these flights and for passengers to be considered “business”, the organization must keep proper records and documentation that align with detailed flight logs, itineraries, invoices, emails, employment taxes and other items. Failure to do so could result in improper classification affecting personal use ratios.

Another area where taxpayers could be vulnerable is in the calculations themselves. Standard Industry Fare Level (SIFL) and Charter Rate Methods are valuation methodologies used to value personal flights taken on corporate aircraft for imputed income, which have proven to be complex and traditionally manual. Aircraft Disallowance has nuances that can trip up administrative personnel. Several components of the personal-use calculations, such as mixed-use, intermediate stops, foreign travel of more than seven days, and seating-capacity rules, can be hard to catch with the naked eye.

Many organizations have used Bonus Depreciation to speed up the deduction of corporate aircraft. Bonus Depreciation rules are predicated on the “Qualified Business Use” concept, which can be easily challenged. That can jeopardize the ratio required to qualify for the deduction. Federal Excise Taxes also contain nuances, such as segment fees, international head taxes and percentage of amount paid, which must be remitted appropriately for applicable operations.

Software Reduces Potential For Human Error

These complex areas of tax law, which are prone to errors, are major points of contention for IRS auditors. Experts believe that acquiring automated tax reporting software could reduce the potential for human error, lessen the administrative load and provide a secure repository for this heavily scrutinized information. Many organizations also face the risk of losing individuals with the expertise to ensure tax compliance when they resign or retire.

Acquiring compliance software or outsourcing these specialized practices could mitigate these challenges. Advanced AI technology, such as MySky Tax, for example, provides comprehensive solutions to automate and streamline these error-prone processes. Owners and operators should anticipate potential IRS audits and consult with their tax professionals.

Implications For Europe

The IRS’s increased examination of private jet usage underscores the importance of compliance and provides critical lessons for Europe’s business aviation market. European tax authorities could adopt similar measures, increasing investigations of aircraft usage and tax compliance.

With this in mind, private jet owners and operators in Europe should proactively address potential vulnerabilities, implement accurate documentation and optimize operational measures to avoid scrutiny.

By embracing advanced technologies, such as automated tax reporting software and staying vigilant about regulatory changes, operators can fortify their compliance efforts and maintain favorable tax positions. As European authorities may follow suit and increased audits from the IRS continue across the U.S., proactive measures today will undoubtedly shape a more resilient and compliant industry tomorrow.

Chris Marich is co-founder and CSO of  MySky,  while Letwan Sutton serves as MySky manager of aviation tax.