Federal Excise Tax Audits: How smart decisions can keep you out of trouble

The Federal Excise Tax (FET) on commercial flights, by definition, is a tax on “amounts paid for transportation by air of persons” under IRC Sec. 4261. This generally refers to transportation by air that begins and ends in the United States. Traditionally non-transportation services such as charges for meals, hotel accommodations and so forth have not been subject to FET, nor have aircraft management services that do not relate to particular flights.

Federal excise tax audits haven’t always been a bone of contention for smaller private aviation companies. More recently, however, management companies, brokers and owners have growing concerns that they may be next on the list to be audited.

The FET has been an easy way for the IRS to target these companies for audit based on the somewhat loose definition of what makes an “amount paid for transportation”. Many private aviation companies charge one fee that includes both transportation and non-transportation components. The operator may subtract the amount received for non-transportation services, and pay the government its 7.5% on the “true” transportation amount, fine. A one size fits all invoice however, while customer friendly, can create a headache. A best practice is to break out the charges for transportation and non-transportation charges for everyone to see. Why make your life hard and the auditor’s job easy?

And what of charter brokers? Upon audit the IRS could view a charter broker as assuming the burden of making sure the FET is paid, despite the fact that he isn’t responsible for the operator’s taxes. The broker could be fingered as a responsible party having touched the taxable amounts. One suggestion: include language in your brokerage agreement that clearly specifies that it is the operator who collects and is responsible for paying “any and all applicable taxes”.

Further, even if you collect a lump sum from you customer, make this separation before sending it along to the operator. You might even consider making two separate payments to the operator based on what THEY consider their taxable or non-taxable services. Be ready to present a detailed account of what you collected, for what, from whom, and who is required to calculate and remit the tax. To a numbers guy numbers speak louder than words.

Contact us today for a brief consultation to make sure your tax records are in line both you’re your business practices and the best practices when it comes to FET. With these matters squared away, and the threat of audit diminished, you can focus your energies where they belong: your business.