Dive Brief:
- The Internal Revenue Service will soon begin audits to identify whether corporations, large partnerships and wealthy taxpayers are violating tax law when recording the use of corporate jets for business and personal travel, IRS Commissioner Daniel Werfel said.
- “These aircraft audits will help ensure high-income groups aren’t flying under the radar with their tax responsibilities,” Werfel said in a statement.
- The IRS will hire examiners and use advanced data analytics to sharpen scrutiny on an area of tax enforcement that it downplayed during a decade of severe budget cuts, the agency said. After assessing initial results, the IRS may further step up audits of aircraft use as it continues to hire more examiners.
Dive Insight:
The IRS has stepped up enforcement since Congress, as part of the Inflation Reduction Act, approved $80 billion in additional funding in 2022. During the previous 10 years, lawmakers cut the agency budget 25%, according to Werfel.
“Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to shelter or manipulate their income to avoid taxes,” the agency said Wednesday. “The IRS is now taking swift and aggressive action to close this gap.”
The agency will use enforcement funds under the 2022 outlay to collect $561 billion more in revenue than previously estimated by upgrading technology, streamlining services and intensifying efforts to make big corporations and wealthy taxpayers pay what they owe, according to the Treasury.
The IRS prioritizes identifying tax evaders among large corporations, complex partnerships and wealthy individuals, Werfel said in congressional testimony on Feb. 15.
"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,” Werfel said in his statement Wednesday.
The agency will “ensure that the taxpayers with the highest income — including partnerships, large corporations and millionaires and billionaires — pay what is legally owed under federal law,” he said.
The IRS has already collected $482 million in a current effort to recoup taxes owed by 1,600 millionaires, Werfel said.
Using artificial intelligence, the agency is also intensifying scrutiny of the balance sheets filed by more than 75 of the largest partnerships, including hedge funds, real estate investment partnerships, publicly traded partnerships and large law firms.
Some taxpayers use partnerships to avoid paying self-employment taxes, the IRS said. They file partnership returns that show discrepancies between end-of-year balances and beginning balances for the following year.
The IRS acknowledged that companies may face difficulties when tracking the use of business jets. “This is a complex area of tax law, and record-keeping can be challenging.”
Companies can take a tax deduction when using an aircraft for business. When CFOs and other executives use a jet for personal reasons, they usually need to record the flight as taxable income.
The audit of jet use is part of an IRS “campaign” focused on an area of high non-compliance, the agency said. Such efforts include stepped up examinations, tax form changes, and taxpayer outreach and education, the agency said.
Funding for stricter IRS enforcement is far from guaranteed.
Republican lawmakers have pressed President Joe Biden to cut $20 billion from the $80 billion in extra funding as part of a spending agreement planned for this year. That rescission would undercut tax revenues by more than $100 billion, the IRS and Treasury Department found in a study released on Feb. 6.
