The Internal Revenue Service (IRS) announced rounds of audits on businesses' private jets to target wealthy individuals who exploit the tax system at the expense of American taxpayers.

The audits will focus on jets used by big companies, partnerships, and wealthy individuals to check if they have falsely labeled personal trips as business expenses. Executives and shareholders must report their personal use of corporate jets and other assets as personal income to the IRS, Commissioner Danny Werfel informed reporters on Wednesday.

IRS Audits on Planes Used by Big Companies

The audits will target planes used by big companies and wealthy individuals to ensure fair allocation of tax deductions. IRS Commissioner Werfel emphasized the importance of ensuring everyone follows the rules during tax season, which began on Jan. 29, saying, "These aircraft audits will help ensure high-income groups are not flying under the radar with their tax responsibilities."

According to the IRS, there are over 10,000 corporate jets in the U.S., each valued at millions of dollars, and many qualify for full deductions.

The Tax Cuts and Jobs Act

The corporate jet audits will start in the spring. They will be conducted under specific sections of the tax code and Treasury regulations related to qualified business use, as explained by IRS large business division chief Holly Paz. These audits are part of the IRS's broader efforts to target wealthy individuals and businesses suspected of avoiding taxes, a priority for the Biden administration, funded by eighty billion dollars in the Democrats' Inflation Reduction Act.

The Tax Cuts and Jobs Act allowed for full deductions and expensing of private jets, enabling taxpayers to write off the entire cost of aircraft purchased and utilized between September 2017 and January 2023.

Werfel mentioned that the federal tax agency will utilize resources from the Democrats' Inflation Reduction Act to carefully review private jet usage, which has not received much scrutiny in the past decade due to significant funding cuts.

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Dropping Audit Rates

During the call, Werfel noted that audit rates have been low. According to an IRS report from April 2023, resource limitations have hampered efforts to tackle high-end noncompliance, stating that in tax year 2018, audit rates for individuals earning more than ten million dollars dropped to 9.2% from 13.6% in 2012. Similarly, corporate audit rates declined from 1.3% to 0.6% during the same period.

A Call for Reassessment

Mike Kaercher, a senior attorney advisor at the Tax Law Center at NYU, suggested that the IRS should revisit how it assesses the value of personal use of corporate planes, not just how flights are documented, adding that the existing regulations undervalue these flights, letting wealthy taxpayers pay less tax than they should based on market value. It is within the IRS' authority to revise such rules.

Werfel mentioned that audits on aircraft usage might rise depending on initial findings and as the IRS hires more examiners, clarifying that not everyone in high-income groups is evading taxes. However, there is still more IRS work needed to ensure everyone pays their fair share.

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