IRS Announces New Audit Initiative Focused on Private Jet Usage

According to the IRS, private jet usage by certain taxpayers just doesn’t fly.

Today the IRS announced plans to initiate dozens of audits on business aircraft involving personal use. A copy of the announcement is linked HERE. The audits will focus on aircraft usage by large corporations, large partnerships and high-income taxpayers and whether use of aircrafts is being properly allocated between business and personal reasons. Coincidentally (or perhaps by design), the IRS announcement follows a January 16, 2024 article by the Wall Street Journal, reporting that executive personal use of corporate jets has increased 35% since 2015 and that spending on such flights has increased by 92%.

The IRS believes aircraft usage is an area that has escaped close IRS scrutiny over the past decade. This is contrary to my own experiences, as private aircraft usage has been the subject – even target – of many high net worth audits of late. Nevertheless, the IRS warns that 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 general, the tax laws allow a business deduction for expenses of maintaining a corporate jet utilized for a business purpose. Use of an aircraft, however, must be allocated between business use and personal use. And the amount of personal usage impacts eligibility for certain business deductions, as well as the amount of income inclusion by the individual. This is a complex area of tax law, and record-keeping can be challenging.

This aircraft initiative is part of a larger effort by the IRS to zealously scrutinize large businesses and high-income individuals. According to IRS Commissioner Werfel:

“The IRS continues to increase scrutiny on high-income taxpayers as we work to reverse the historic low audit rates and limited focus that the wealthiest individuals and organizations faced in the years that predated the Inflation Reduction Act. We are adding staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law. The IRS will have more announcements to make in this important area."

In my experience, taxpayers commonly make a good-faith effort to capture and account for personal aircraft use. Issues arise in the creation and maintaining of contemporaneous records. The absence of good record keeping has prompted the IRS in some examinations to label the aircraft as an “entertainment facility” under IRC Section 274, which has the legal effect of denying all deductions – even those deductions associated with business use. Taxpayers with private jets would be well advised to review their documentation with an eye toward developing ways to improve the way they track business and personal use.

If you have any questions about this Blog post or any other Treasury, IRS or tax-related matter, feel free to contact me directly at (214) 749-2464 or adaddino@meadowscollier.com.