Business Aviation Insider - November/December 2013 (PREVIEW) - (Page 12)
Advance Preparation Is Key to Dealing With an IRS Audit
The last thing that a business aircraft owner or operator wants
to hear is that their flight operation is the subject of an Internal
Revenue Service (IRS) audit. Even with careful tax planning and
NBAA's work to continuously educate IRS staff about the importance of business aviation to a company's bottom line, general
aviation aircraft are still an audit target, especially in light of the
federal government's continuing efforts to generate new revenue.
While the vast majority of business aircraft owners and operators endeavor to pay the taxes they legitimately owe, complex
and inconsistently interpreted IRS polices often lead to confusion
and potential audits. Take for example what is a seemingly simple
question: is the use of a business aircraft ordinary and necessary
to the normal course of a company's business?
For many small businesses, or entities where aircraft expenses
are large in comparison to other revenues or expenses, the "ordinary and necessary" question is a common audit issue.
"It is critical for the company to document legitimate business
reasons for using the aircraft," explains Angel Houck a certified
public accountant (CPA) with CliftonLarsonAllen LLP in Orlando,
FL. Strategies include maintaining corporate meeting minutes
that explain the business purpose of the aircraft and approving a
specific plan for using the aircraft in business, said Houck.
Regardless of the type of audit, keeping detailed flight logs
that document the business and non-business use of the aircraft,
specific passengers on board, destination information and other
details is very important. "The IRS agent will want to look at
12 | Business Aviation Insider
these specific records for each flight, and you must be prepared
to present them," explained Jed Wolcott, president of Wolcott &
Associates, CPAs in Fort Lauderdale, FL. The flight logs also must
be "contemporaneous," meaning the flight information should be
created at the time of flights, not when the auditor walks into your
In most cases, once the IRS initiates an audit, there will be a
visit by a field auditor, who will likely request specific information in advance. "Plan ahead, review the records and have them
available. Also, designate someone who will be the main point of
contact for the auditor, and ensure that person is with the auditor during the visit," stressed Houck. While you want to provide
the auditor with all of the information he or she is looking for, the
visit must be well managed, and only employees designated in
advance should meet with the auditor.
Based on his experience, Wolcott explained that the field examination is the most crucial portion of the audit. "If you succeed in
eliminating an issue at the field-audit level, it is gone. Once you
move to the supervisor or appeals level, negotiations become
more difficult," said Wolcott. Taxpayers should remember that at
this initial audit level everything is still negotiable.
"It is critical for the company to document legitimate
business reasons for using the aircraft."
One of the most common questions is how far back can the
IRS audit a tax return? "In general, the IRS can audit returns filed
within the last three years, but if substantial errors are found, they
can go back six years," said Houck.
With audits being a fact of life for many business aircraft operators, developing a robust record-keeping system, staying on top of
current IRS policies and obtaining qualified aviation tax and legal
counsel in advance of a potential audit are key strategies. ✣
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