Air taxis under IRS fire

July 6th 2:13 pm | Hannah Heimbuch    

Alaska's smaller air carriers, with support from Sen. Mark Begich's office, are seeking resolution to what some are calling bullying by the Internal Revenue Service toward air taxi companies in Alaska.

The amount of federal excise tax required from an air carrier depends on its purpose — commercial versus noncommercial, or private — along with several exemption categories. Exemptions include seaplanes, sightseeing trips and small planes operating on nonestablished lines. Charter flights have typically been in this category, as their time and destination are negotiated with the buyer, and not on a set schedule.

Many of Alaska's rural air carriers have long fallen under these exemptions, requiring them to pay the fuel tax but not the additional tax put on commercial transportation of people and property.

Until now.

New and what some call vague interpretations of these guidelines have recently caused a

significant strain to small carriers as audits and retro taxes pile on.

"The IRS is engaging in predatory collection practices as it targets small Alaska air taxi companies," read an Alaska Air Carrier's Association statement. "Making use of broad over-reaching interpretations of ambiguous Federal Excise Tax regulations."

According to the AACA there are fundamental differences between the IRS interpretation and the Federal Aviation Administration's interpretation of aviation guidelines and exemptions. The association also claims the IRS has been significantly inconsistent in its own interpretation.

Senator Begich released a letter to Treasury Secretary Timothy F. Geithner, criticizing recent IRS actions.

"Unfortunately, the revenue agents at the IRS have taken the erroneous position these exemptions do not apply to many of the air taxi operations in Alaska and have insisted on enforcing excise taxes based on overly vague Treasury Regulations even when the flight operations of a small carrier clearly fall within an allowable exemption," Begich wrote. "Worse, the IRS is applying its interpretation retroactively, charging back taxes and applying penalties when the air taxi operators have no ability to go back and collect additional fees from past customers."

The AACA points out many examples of IRS tax law interpretation that does not fit with longstanding tradition or their view of fair tax practices.

"Multiple ambiguous aspects of the excise tax, and grossly inappropriate IRS interpretations, are creating not only confusion in the industry, but dynamically threaten the ability of businesses to comply," said an AACA statement. "The regulation is confusing and interpreted in multiple ways by IRS auditors."

For instance, the exemption of sightseeing flights has been under fire, according to the AACA, with the IRS claiming that such flights are regular and between two points and thus subject to tax. The AACA maintains that since these flights begin and end at the same location, they fall under the exemption.

Also during such flights, a brief touchdown at a glacier or wildlife hotspot is common. This brief and temporary stop, says the AACA, is now being taxed at the same rate as if the carrier has transported passengers to a major airport hub on a regularly scheduled flight. They call for a redefinition of vague terms to account for deserved exemptions and reduce inaccurate interpretations.

The definition of what is and is not an established line of air travel seems to be the point of highest contention, affecting carriers across Alaska. The AACA claims that the IRS does not adhere to the regulations, which they quoted as "between two cities also served by that carrier on a regularly scheduled basis."

The association maintains that chartered flights, very common in rural Alaska, do not fall into this commercial category. Just because a destination is visited frequently, does not mean it is serviced by regularly scheduled and established flights.

The AACA claims not only unjust but suspicious actions and demands from IRS auditors.

"Although experience shows that ninety percent of all challenges on aviation excise taxes are overturned in court," reads the AACA statement, "the IRS threat to Alaska carriers is that if they challenge current three-year audit findings, the IRS will come back for a full seven-year audit."

These audits require time, staff and commitments away from regular business operations that further stress the small business owner/operator, the statement went on to say.

"In addition, the IRS appears to be targeting these audits specifically in the busy summer flying season — suspiciously coinciding with good fishing and travel opportunities for visiting auditors, and during high hotel cost periods. The financial and staff time burden imposed on small businesses to undergo and IRS audit is substantial."

The concern coming from Begich's office, in response to communication from the AACA as well as individual carriers, is that these vague interpretations are being carried out forcefully and without opportunity for formal objection or a demand for clearer tax law from those being taxed.

"This type of intimidation tactic is completely inappropriate for small businesses seeking to understand and comply with a complex and at times unclear tax system," Begich wrote to Secretary Geithner. "These small businesses are not tax evaders. They are hardworking men and women attempting in good faith to comply with the unclear framework and erratic interpretation of the Internal Revenue Code and regulations by IRS auditors."

Senator Begich has requested a meeting with the Treasury Secretary or the appropriate IRS representative to further discuss the issue.

The AACA seeks resolution of several specific interpretations to help ease the financial stress additional taxes have put on small carriers.

More information can be found at www.alaskaaircarriers.org.

Hannah Heimbuch can be reached at hheimbuch@reportalaska.com.

 

---

Contact us about this article at editor@thearcticsounder.com