Top Bizav Attorney: IRS Audits 'Going To Be Very Intense.'

What you need to know.

The IRS has begun a half-dozen audits of what will be an initial tranche of 50 into the use of business jets. Based on the first few, “it's going to be very intense and it's going to be something that the industry hasn't seen on this level,” warned David Shannon, a partner with and chair of the business aviation practice for Lewis Brisbois, recently at the National Business Aviation Association's Regional Forum in White Plains, New York.

In February, the agency revealed plans to launch “dozens” of audits on business aircraft use to ensure that large corporations, partnerships, and high-income taxpayers are properly allocating between personal and business use for tax purposes. Additional funding received from the Inflation Reduction Act enabled the IRS to increase staff so it could “closely examine this area, which has not been closely scrutinized during the past decade,” the agency said.

Shannon informed that the first batch so far has involved high-net-worth individuals, including a few well-known names, and closely held corporations, mostly on the West Coast. The audits have not yet extended to Fortune 500 corporations. They are focused on 2022 during the tail end of COVID.

“The IDR [the IRS Information Document Request] we received…is twice as long as some IDRs are and the things they’re asking for are extremely thorough,” Shannon said. “We’re at the stage where we need to treat this with the level of seriousness that the situation requires.”

Noting that there is a small pool of aviation attorneys and accountants with experience in this area, he added: “The fact of the matter is that we don't have the capacity as an industry to handle those 50 audits that are going to come to this initial way. After these initial 50 audits for the large businesses, the algorithm that they're using is going to be modified and then you're going to have hundreds and hundreds of audits. Our industry cannot handle hundreds and hundreds of audits.”

He urged the audience to prepare now and go through a mock audit. “You have to go through all of your documentation now because when you get the phone call or when you get your notice in the mail, it's not going be the only one that goes out. There's going to be dozens of these that are going to keep coming out week after week after week.”

In addition to the normal corporate documents and minutes, the IRS is seeking a lengthy list of documentation on a range of items, including medical; charts; journal entries; a general ledger that includes balances for every account number; and all officer and employment information. “And then we get to page two of the IRD, which has 17 other [requests],” Shannon said. “Most people do not have some of the things that are on this list.”

He pointed to company policy on aircraft. “Most high-net-worth individuals do not have that. Some corporations do not have that.”

The regulations themselves are complex and sometimes convoluted, but if a company is unclear on the documentation, it is leaving the determination of the flight in the hands of the auditor. “I want everyone to understand that those flights need to be documented thoroughly because that's what they're coming after,” he said, adding that for some companies that still had Covid restrictions in place in 2022, the audit can be particularly tricky.

“If they can attack your qualified business use and you only have a couple of flights that will kick you out of the bonus depreciation, that's what they're coming [after],” Shannon said. “If there's only one or two flights, if they can challenge a flight and show that it's not documented properly, you're going to lose the bonus.”

He called that tact “opposite of the center,” noting that the whole concept of bonus depreciation is to drive growth.