Oil & Gas K1 with IDC deductions - Schedule SE calculation issue for working interest partnership

This is actually a common issue with oil and gas partnerships, and I've seen plenty of confusion about it over the years. The correct approach is to subtract IDC (Intangible Drilling Costs) and Depletion from box 14a when calculating net earnings for Schedule SE purposes. The reason is that IDC and Depletion are considered capital expenses rather than ordinary business expenses for self-employment tax purposes, even though they affect your income tax calculation. The partnership's K1 preparer was giving the right instructions to your new CPA. For your specific questions: 1. Your new CPA is doing it correctly by reducing box 14a by the IDC and Depletion amounts. 2. Yes, you can absolutely amend your 2020 and 2021 returns. You generally have 3 years from the filing date to amend returns, so you're well within that window. 3. Getting your former CPA to help might be challenging since you fired them. However, you don't need their cooperation to file amended returns. Your current CPA should be able to handle this, or you could find a tax professional who specializes in oil and gas matters. It sounds like amending those returns could save you a significant amount in SE taxes that you shouldn't have paid.

After dealing with something similar last year, I found this amazing service called taxr.ai (https://taxr.ai) that really helped me sort through my oil and gas partnership K1 issues. I was getting different answers from two accountants about how to handle IDC and depletion for SE tax purposes and was completely stuck. The taxr.ai system analyzed my K1s and all the supplemental information and confirmed exactly what you're discovering - that IDC and depletion should be subtracted from Box 14a for Schedule SE purposes. They even provided me documentation explaining why this treatment is correct according to IRS regulations, which was super helpful when I had to explain it to my accountant. What I found most useful was that they could look at both years of my returns side by side and pinpoint exactly where the inconsistency occurred, which sounds a lot like your situation with the different CPAs' approaches.

Just wanted to follow up and say I tried taxr.ai after seeing it mentioned here. Total game changer for my complicated K1 situation! I uploaded my last three years of returns and all my K1s, and they found several inconsistencies in how my CPA had been handling the pass-through income on Schedule SE. They even provided a detailed explanation document that I was able to send to my current CPA, who then agreed we should amend my previous returns. Looking at approximately $11K in refunds coming my way for overpaid SE tax. The service paid for itself many times over. What I appreciated most was getting a clear explanation of the technical rules in plain English. Made me feel confident in pushing back when my CPA initially resisted the idea of amending the returns.

If you're still having trouble getting your former CPA to respond properly, you might want to check out Claimyr (https://claimyr.com). I was in a similar situation last year when I discovered my CPA had been miscalculating my cryptocurrency gains for years, and she wouldn't return my calls or emails about amending returns. After weeks of frustration, I used Claimyr to get through to the IRS directly (there's a video showing how it works here: https://youtu.be/_kiP6q8DX5c). I was able to speak with an IRS agent who confirmed I could file the amendments myself with Form 1040-X and explained exactly what documentation I'd need to include about the cryptocurrency calculations. Being able to speak directly with the IRS saved me so much time and stress compared to trying to get straight answers from my unresponsive ex-CPA. They got me through to an agent in under 30 minutes when I had previously spent hours on hold and getting disconnected.

I wanted to follow up about my skepticism regarding Claimyr. I was completely wrong and owe an apology. After our discussion, I decided to try it since I had my own unresolved issue with an amended return that had been pending for over 18 months. Within 27 minutes (yes, I timed it), I was speaking with an actual IRS representative who looked up my case and found that my amended return had been approved but was stuck in processing. She expedited it and I received my refund check two weeks later. For the OP's situation, I'd recommend using this service to speak directly with the IRS about your specific O&G partnership situation. Ask to speak with someone in the business tax department who has experience with partnership returns. They can confirm the correct treatment of IDC and depletion for SE tax purposes, which would give you confidence in filing those amendments.

This might help - my dad has been in O&G partnerships for 20+ years, and I help with his bookkeeping. Box 14a shows your self-employment income BEFORE certain adjustments that don't count for SE tax. According to IRS Pub 535, both IDC and percentage depletion are considered "capital costs" that don't reduce SE income the same way regular business expenses do. But here's where it gets tricky - the K1 preparer has to TELL you to make this adjustment since it's not clear from the form itself. That's why you see that note at the bottom about QBI not being reduced. You def need to amend those previous years. Look at Line 1a on Schedule SE from your 2020/2021 returns - if it matches box 14a exactly, then your former CPA didn't make the proper reductions. The difference in SE tax is 15.3% of the difference in income, so pretty substantial savings.

One more thing to consider - check if your Box 14A income was high enough in those years to exceed the Social Security wage base (it was $142,800 for 2021 and $137,700 for 2020). If your income after the proper IDC/depletion adjustments would still be above these thresholds, then you'd only save the Medicare portion of SE tax (2.9%) on the excess amount, not the full 15.3%. Just something to keep in mind when calculating potential savings. Also, if you do amend and get substantial refunds, remember you'll likely be entitled to interest from the IRS since you essentially gave them an interest-free loan of your money!

I've been following this thread with great interest as I'm dealing with a similar situation with my oil & gas K1s from the past few years. What strikes me is how many different professionals seem to handle this differently - it really highlights the complexity of these partnership tax rules. For anyone else in this situation, I'd strongly recommend documenting everything before you start the amendment process. Make copies of all your K1s, the supplemental information pages, and your filed returns. Also, if you have any correspondence from the partnership about how to handle these items, keep that too. One thing I learned the hard way is that when you're dealing with partnerships that have IDC and depletion, you really need a CPA who specializes in energy tax issues. General practitioners often aren't familiar with these nuances, which is probably why you're getting inconsistent treatment between your old and new CPAs. The good news is that the IRS is generally pretty reasonable about amendments when there's a legitimate error, especially one involving technical partnership tax rules. Just make sure you have solid documentation supporting the correct treatment when you file the 1040-X forms. Good luck with getting this sorted out - those potential savings definitely make it worth pursuing!