Aircraft Tax Audits – Aviation Tax Lawyer Ari Good, JD LL.M.
IRS Aircraft Audits
Managing an IRS aircraft tax audit takes very special skills and experience. The IRS has become very aggressive about auditing private aircraft owners, whom it views with suspicion when it comes to aircraft depreciation and the personal use of aircraft. Some of the issues that the IRS will audit include:
Aircraft depreciation deductions, especially where airplane owners took advantage of aircraft bonus depreciation allowances over the past ten years or so. These allowances generated large aircraft tax deductions the IRS views with suspicion;
SIFL (Standard Industry Fare Level) income (income that you must recognize when you use your plane for certain types of personal use, or where you carry non-business “hitchhikers” on board);
“Passive activities” (the IRS may view your aircraft leasing business as passive, rather than active, limiting your aircraft tax deductions);
Hobby losses. The IRS will try and characterize small aircraft owner-pilots (including many Cessna, Cirrus, Diamond and Piper owners), as engaged in a hobby, limiting your aircraft tax deductions to what money you make from your aircraft business. This requires that you carry over all other losses, delaying the tax benefits of your business aircraft use;
Activities “not engaged in for profit”. I have seen this recently for smaller aircraft owners who place their aircraft with flight schools. The IRS will try and characterize the entire aircraft leasing operation not just as a “hobby”, or “passive”, but personal and therefore entirely non-deductible. This is a very aggressive position and one that can result in a huge tax bill without the proper representation;
Federal Excise Tax. Another area the IRS has been very aggressive is in the area of federal excise tax. Federal excise tax applies to “amounts paid for taxable transportation”. In the non-commercial setting taxable transportation includes amounts paid for charter (Part 135) flights. The IRS is now also trying to assess federal excise tax to certain aircraft management agreements, on amounts that large jet owners pay for pilots and other services. A federal excise tax audit can be an expensive experience. As a qualified aviation tax lawyer I know what to expect in a federal excise tax audit and how to handle it.
Florida Department of Revenue Sales Tax and Use Tax Audits
Like the IRS the Florida Department of Revenue has committed a huge part of its resources to auditing aircraft owners. The Florida Department of Revenue is interested in whether the airplane owner has paid state sales tax or use tax on the plane. Some of the typical attacks in an aircraft sales tax or aircraft use tax audit include:
Sales tax exemptions. The aircraft owner does not qualify for its sales tax exemption. Sales tax exemptions often include the “sale for resale” or “dealer” exemption, under which the aircraft owner will create a leasing company to own and lease the aircraft to related and unrelated parties. There are other exemptions that you may not have known about, such as the interstate commerce exemption or where your aircraft is used by a commercial operator. Surviving an aircraft sales tax audit requires an thorough understanding of and willingness to defend these exemptions;
Your aircraft lease is not fair market value. Years of reckless tax planning by certain aircraft tax advisors have drawn considerable attention to the rates your leasing company are charging for the “dry lease” of your aircraft. I know of certain calculations that we can perform to determine if you have a fair market value lease, a rate that can stand up to an aircraft tax audit without “tipping” the state with money you don’t need to spend.
Florida jurisdiction. A big question is whether the state has the right to tax you at all. If you are a non-resident bringing your aircraft into Florida for only a limited amount of time, or if you are bringing in your private airplane for certain specific purposes, you may be able to avoid an unnecessary sales tax bill. Again, qualified aircraft tax planning is essential.
Having the right aviation tax attorney to deal with your aircraft tax audit can make all the difference.
When you interview an aviation tax professional always ask the following questions:
(1) How well do you know aircraft tax law? I have helped hundreds of aircraft owners buying and selling planes, and defended hundreds more against the IRS and the Florida Department of Revenue. Aircraft tax law is not for “garden variety” tax lawyers. It is a specialized field requiring the right background.
(2) How much audit experience do you have? It’s not enough just to know aircraft tax law. Your aircraft tax attorney also has to have experience dealing with the complicated bureaucracies of the IRS and the Florida Department of Revenue. Demand a strategic attorney who can play this game of chess and play it to win.
(3) Can you take my aircraft tax audit to Tax Court? I’m surprised at how many aircraft owners don’t know that most aircraft CPAs can’t represent you in Tax Court. Neither can aviation lawyers who are not admitted to the United States Tax Court. I can take your case all the way to the United States Tax Court if you are audited on your business aircraft, and the IRS knows this. The IRS may think twice in your aircraft tax audit if they know that your aviation tax advisor has the power to hand them a bad precedent.