Corporate jet users brace for more IRS audits

Corporate jet owners and operators are bristling at the dozens of additional audits that are coming their way later this spring as announced last week by the IRS.

Industry groups say jet users haven’t been doing anything wrong, while tax experts say more diligent taxation of corporate perks such as jets is a good way to broaden the tax base in pursuit of the roughly $700 billion a year that goes uncollected by the IRS.

The agency hasn’t said how much it expects to collect from the increased enforcement on jet use but has pointed to $482 million in taxes recouped so far from millionaires as part of the agency’s enforcement push on richer taxpayers.

The National Business Aviation Association (NBAA), an industry trade group for companies involved in business air travel, is questioning why the IRS is targeting corporate flyers.

“[The] announcement by the IRS amounts to nothing more than an audit in search of a problem,” NBAA President and CEO Ed Bolen said in a statement sent to The Hill by the FleishmanHillard marketing agency.

“It is difficult to understand why the agency is suggesting that these companies … are not in compliance with applicable tax laws,” Bolen said.

The NBAA said executive and management use of corporate jets for personal purposes is “routinely” approved by publicly traded company boards, though it’s not clear what that has to do with U.S. tax laws.

“Directors at publicly traded companies routinely approve use of the aircraft, including for non-business reasons, by key personnel, and some businesses mandate that certain employees travel aboard company airplanes in all circumstances, out of safety and security concerns,” the NBAA said in a statement.

The IRS said Wednesday that people who use corporate jets for personal reasons need to note those flights down on their taxes as forms of personal income, on which they then should be paying taxes.

The three to four dozen additional audits relating to corporate jet use will probe whether this bookkeeping has been accurate, IRS officials said.

Tax experts say not reporting flights as income is just the tip of the iceberg when it comes to how corporate jets are used to flout tax laws.

Even when the flights are being logged as income, their costs — which include fuel, pilots and flight attendants’ wages, food and amenities, and airport fees — are being grossly undervalued, according to a study by the New York University (NYU) Tax Law Center.

The undervaluing is possible because plane trips are legally recorded as income using a specific kind of rate, called a Standard Industry Fare Level (SIFL) rate, far below the normal market rate for private plane trips.

“While highly administrable, the income inclusions are far below the market rate. Currently, the SIFL rates range between 18 cents and 25 cents per mile, far lower than charter rates which can be in the $8 to $23 per mile range,” NYU experts found.

The SIFL rates are closer to the range of rates for mass-market commercial flights, which have a far higher density and number of seats than private plane trips on average. United Airlines’s cost-per-seat-mile was about 17 cents in 2022, according to a company filing.

Experts say the use of the SIFL rate for corporate jets is tantamount to having the government subsidize the personal use of corporate jets.

“As the IRS focuses on private jets, it should revisit how it values personal use of corporate aircraft. The current rules allow these flights to be significantly undervalued, enabling wealthy filers to pay much less in taxes than fair market value would dictate, and it’s within the IRS’ authority to revise these rules,” Mike Kaercher, senior attorney adviser at the NYU Tax Law Center, wrote in an analysis.

The IRS did not speak about the SIFL rate in its Wednesday call on company jet usage with reporters, focusing instead on lapses in income reporting. 

However, IRS Commissioner Danny Werfel said Wednesday that the IRS is going to use what it learns from the new audits to inform future enforcement protocols.

“Our audit rates have been anemic,” Werfel said. “When we’re not doing the requisite amount of audits, that does indeed increase the risk of noncompliance.”

The IRS is currently in the middle of a general refurbishment made possible by an initial $80 billion funding boost in 2022, in which artificial intelligence and new analytical capabilities are being developed and implemented.

While company jets, which are used almost exclusively by some of the richest Americans, have symbolic value for the IRS as it goes after wealthy tax cheats, the actual tax revenue that can be generated from fairer taxation of jets is less than $1 billion over 10 years, an amount the NYU Tax Law Center designates as “small.”

More significant ways to collect more in tax from business executives and those who fly in corporate jets include making deferred salaries taxable in the year they’re earned, getting rid of deductions for dividends received from foreign companies and limiting the types of assets that can be held in retirement accounts, the center said.