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Despite IRS Concession, Aviation Tax Issue Still Threatens Small Carriers

Published On: Mar 17 2014 02:00:00 PM AKDT
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An aviation tax issue stinging small Alaska carriers with hundreds of thousands of dollars in back taxes remains unaddressed Monday, despite a recent announcement from the Internal Revenue Service promising relief.

At issue is a push by the IRS to audit small carriers for hundreds of thousands of dollars in unpaid excise taxes, taxes the carriers say they never knew to charge due to the IRS’s “ambiguous” regulations.

Audits for unpaid excise taxes have hit small carriers hard, delivering fees and fines ranging $100,000 to $1.8 million.

“For years we’ve asked the IRS to explain what these (regulations) mean,” said Joy Journeay, the executive director of the Alaska Air Carriers Association.

Journeay says the IRS refuses to revise the confusing language while continuing to hit small carriers with expensive audits, and that's lead to confusion among carriers and uncertainty over how much, if any, taxes are owed.

The excise taxes are normally assessed on passenger and cargo flights during regular flights; smaller planes flying on unestablished routes usually pay a lesser fuel tax.

As it stands, the IRS’s regulations state simply that small aircraft weighing less than 6,000 lbs. are exempt from excise taxes. The tax code, however, adds a list of exemptions (and exclusions to those exemptions) determined by the type of airfield on which a plane lands, the frequency with which flights fly certain routes, and even whether or not a flight is “solely” for sightseeing.

The smaller carriers have turned to expensive tax lawyers and Alaska’s congressional delegation in Washington for relief. Journeay said eight firms represented by the association have been audited; four have since gone out of business, “directly as a result of the audits.”

Journeay says the solution would be as simple as making the IRS rulebook match the FAA’s language. That would eliminate the confusion over whether operators should pay excise or fuel taxes.

The question “would immediately go away, and everyone would know how they’d have to pay,” Journeay said.

On Friday, the IRS responded to continued pressure from Alaska’s congressional delegation.

In a letter to Sen. Mark Begich (D-Alaska), IRS Commissioner John Koskinen writes that IRS “will provide retroactive relief o affected air transportation operators for … excise tax previously paid on day tour flights.”

Beigch called it “another example of a federal agency not understanding Alaska … It took a lot of time and persistence (we are) finally getting the IRS to move in the right direction.”

That “relief” means small companies taking clients on day trips won’t have to pay the excise tax for 2013, but Journeay says that doesn’t address the larger issues of ambiguous tax language and the millions of dollars in taxes the IRS is asking of small aviation companies.

“Carriers are hesitant to make a change because, maybe they’re doing it right” Journeay shrugged. “Or maybe they’re doing it wrong.”

Journeay, the association, and affected businesses are asking for a moratorium on the audits, penalties and interest until the law is clarified. But based on the time it’s taken the IRS to make even this recent small concession, it could still be a long fight before the issue is finally resolved.