41 JULY 2024 WorldWide Drilling Resource® Drilling Into Money Not Boring by Mark E. Battersby Successfully Surviving an Avoidable Tax Audit The Internal Revenue Service (IRS) recently announced plans to significantly ramp up the number of audits for so-called “wealthy taxpayers” and large corporations. They’ve also announced a coordinated enforcement strategy for tackling the tax returns of large partnerships, digital assets, offshore accounts, and unpaid back taxes. As if that was not enough, the IRS also has a new unit formed specifically to focus on pass-through entities such as S-corporations, Limited Liability Companies (LLCs) and, of course partnerships, but with only a very small fraction of businesses (around 1% to 2%) actually being subjected to an IRS audit, does the owner or operator of a drillingrelated business really need to worry? Unfortunately, the IRS’s efforts to improve tax compliance and its increased hiring of staff needed to conduct complex audits may mean better results from a relatively few number of audits. Most dangerous for many drilling professionals and their operations is the IRS’s increased use of artificial intelligence to select what businesses to target for an audit. While the IRS claims they will only target individuals and businesses with incomes in excess of $400,000, data from the U.S. Census Bureau show a small business with only five employees would bring in more than $424,000. What’s more, despite the IRS’s increased emphasis on special targets, most audits continue to be generated randomly. While some risk factors such as having a high income can’t be avoided, the risk of an audit can be reduced with an awareness of certain red flags thought to be used by the IRS to ensure the individual or business isn’t avoiding taxes by overreporting expenses, taking ineligible deductions, or misclassifying employees. Substantial or unusual deductions are also red flags, as are business losses claimed for multiple years and, of course, mistakes on the tax return. And, don’t forget underreporting or hiding income is more difficult with third-party payees required to report amounts to the IRS. Basically, an audit is simply a second look at a drilling professional or their operation’s tax return for a particular year. While concerning, a tax audit typically results in nothing more than an additional tax bill and occasionally a penalty. If the examination does result in an assessment of additional taxes, appeal after appeal is possible until at some stage compromise is reached, or the targeted drilling professional satisfied. Naturally, a qualified professional can help avoid, cope with, and appeal audit results. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com 2024 Booths 403 & 405
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