7 MAY 2023 WorldWide Drilling Resource® Drilling Into Money Not Boring by Mark E. Battersby Avoiding Tax Audits the Right Way While the Internal Revenue Service’s (IRS’s) own figures reveal that, in general, only one or two percent of all taxpayers actually have their returns audited each year, the threat of an audit continues to strike fear into every drilling professional. And, this fear increased dramatically with the IRS’s reported plans to hire an additional 87,000 workers. The IRS takes a dim view of a failure to report income than a minor overstatement of deductions. Keep in mind, there are penalties and then there is the fraud penalty - equal to a whopping 75% of the unreported tax. Fortunately, there are perfectly legal strategies which can greatly reduce an audit threat. The IRS obviously checks the math on every return and too many errors will trigger red flags. Incorrect totals for expenses, missing Form 1099s, and transposed numbers are all believed to concern the IRS - even if the mistakes are not big. The type of business can affect deductions, especially those related to employment versus operating a business. Although employment is considered a business, an employee’s business expenses are largely relegated to being itemized deductions which aren’t currently available. The Tax Cuts and Jobs Act of 2017 largely eliminated employee expense deductions until 2026. The IRS is also reportedly on the lookout for numbers that are too round. After all, it is unlikely all of the numbers shown on any return will end in fives, tens, or even thousands. While many unexpected and significant swings in income can usually be easily explained, large inconsistencies in income from year to year are often an area of concern to the IRS. Changes in the amount of income reported is considered a main indicator of underreported income. Because a portion of all audits are truly random, it is impossible to fully inoculate the drilling operation or its owner from an audit. There are, however, steps which can be taken to minimize the likelihood of receiving the feared notice from the IRS. Obviously, everyone should claim deductions they or their business are legitimately entitled to. Honesty and clarity go a long way toward preventing, dealing with, and surviving an IRS audit. Naturally, every drilling professional and business should have a strategy for avoiding audits, as well as for dealing with an IRS auditor. A fallback position should those strategies fail should also be in place, as should professional assistance. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com
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