Attachment 1 - Audit Steps for EOR Tax Credits
Audit Steps for EOR Tax Credit
1. Identify if the issue is present.
For costs incurred during the taxable year, the EOR credit is claimed on Form 8830 (EOR Credit) and flows into Form 3800 (General Business Credit). There may be one or more Forms 8830 depending on whether the taxpayer consolidates the return of several corporations. Depending on the AMT or NOL position of the taxpayer, they may have to carry forward the EOR credit generated during the current exam year. Conversely, it is also possible that the general business credit which offsets tax liability in the current exam year is attributable to EOR credit generated in a previous year, possibly including a year that is otherwise barred by the statute of limitations.
Examiners should consult with the Team Coordinator to determine the procedure to examine the EOR credit carry forward if it was not previously examined. If you receive an 1120X or a claim for refund regarding new EOR credit being carried forward and used on the 1120X or claim from a tax year that is barred, contact your local counsel for assistance.
Examiners should also review Form 4764 and the previous Revenue Agent Report (RAR) to see if and how the EOR credit was addressed in a previous examination.
2. Issue “First IDR” (see Attachment 2) to obtain basic information on the amount of the credit by project and also to verify the underlying expense / basis has been properly reduced by the amount of the credit.
3. Once the project names have been secured, the examiner should contact the Petroleum Technical Advisor to find out if he / she is aware of any related audit activity on them. For instance, the project may have been previously owned by another company and the IRS may have already examined certain aspects of the project. Similarly, the project may be co-owned by other companies and certain aspects of the project for the years of your audit may have already been examined.
4. Issue “Second IDR” (see Attachment 2) to obtain the certifications on projects that are material in size, and for which there is little if any audit history.
5. In order to gain additional insight into the taxpayer’s projects, search for supplemental information at one or more of the following publicly available sources:
• Internet articles, such as those published in the Oil and Gas Journal
• Technical articles, such as papers of the Society of Petroleum
Engineers (see www.spe.org)
• Filings with State or federal oil and gas commissions. EOR projects
are closely regulated and there often are hearings, applications, or
permits on file
with these commissions. Some information may be available via the
• The taxpayers’ own website
6. Determine which projects should be looked into closely. Information to include in making this determination include:
• Size of the credit
• Audit history from other examinations of the project
• Inconsistencies between the facts stated in the certifications and those
available from other sources
• Inconsistencies between the amounts claimed and the available facts
(e.g. if substantial IDC is claimed but the Operator’s Certification says
no wells were drilled during the year)
• History of the taxpayer with other EOR projects
• Date of first injection is stated to be January 1, 1991
7. If necessary, issue “Third IDR” (see Attachment 2) to obtain information on the operator and working interest owners, and more detailed information regarding the costs.
8. Review all information to determine if an issue might be present or if additional information is needed. A consultation with a petroleum technical advisor at this time could be very useful. They have experience with the EOR issue and also have materials that explain about the various EOR processes.
9. Depending upon the results of the previous step, consider one or more of the following:
• Issue further IDRs on specific areas of concern (see Attachment 2)
• Interview the preparer of the Petroleum Engineer’s Certification.
Contact the Petroleum TA for assistance with interview questions.
• Interview the taxpayer’s personnel who determined what costs were
qualified for the EOR credit. The purpose of the interview would be
to determine what information, data, procedures, methodologies,
assumptions, etc. were relied on in making such determinations, and
whether the resultant costs were reasonable.
10. Determine what, if any, issues are present. Typical issues are listed immediately below. The Petroleum Technical Advisors can assist the examiners in determining if material issues appear to be present.
• Significant Expansion Issue
• Qualified Costs
• Tertiary Injectant Costs