Written by Sam Brotman, J.D., LL.M. (Taxation), MBA — Managing Attorney, Brotman Law  ·  Updated May 2026

Tax Matters Sam Handles for Kern County Clients

A tax attorney handles IRS and California tax disputes as legal matters, not accounting problems. In Kern County, that distinction is particularly important for two categories of clients: oil and gas operators and royalty owners who face specialized deduction audits, and small business owners in cash-intensive industries who face IRS indirect method examinations. Both require someone who can represent you in formal proceedings and evaluate when a civil audit has criminal exposure.

For Bakersfield and Kern County clients, the matters I handle most often are IRS audits of oil and gas tax deductions (percentage depletion, intangible drilling costs, royalty income), CDTFA sales tax and oil extraction excise tax disputes, EDD and IRS payroll tax audits of agricultural and food service employers, ERC-related IRS examination notices, and IRS collection matters. I also handle criminal tax defense for Kern County clients facing IRS Criminal Investigation referrals or grand jury subpoenas.

Oil and Gas Tax Issues in Kern County

Kern County is one of California’s major oil-producing regions, and the federal tax treatment of oil and gas production is among the most audit-prone areas of the Internal Revenue Code. The IRS consistently targets oil and gas deductions because they are complex, the dollar amounts are often significant, and many taxpayers — and their preparers — get the details wrong.

Percentage Depletion (IRC § 613)

Percentage depletion is a tax deduction that allows oil and gas producers to recover the cost of extracting a wasting resource. Under IRC § 613 and § 613A, independent producers and royalty owners can generally deduct 15% of gross income from oil and gas production as a depletion allowance, subject to a taxable income limitation of 100% of net income from the property. The IRS examines percentage depletion claims for several reasons: improper aggregation of properties, failure to track the deduction against taxable income from each property, and, for larger producers, whether the taxpayer qualifies as an “independent producer” rather than an integrated oil company (which is not eligible for the 15% rate).

Intangible Drilling Costs (IRC § 263(c))

Intangible drilling costs (IDCs) — the costs of labor, fuel, chemicals, and supplies used to drill a well — can generally be deducted in the year incurred under IRC § 263(c) rather than capitalized and depreciated. The immediate deduction is one of the more valuable tax benefits in the oil and gas industry, and the IRS audits it aggressively. The most common issues: whether costs claimed as IDCs are truly intangible (some well components are tangible and must be depreciated), whether costs were incurred in the year claimed, and whether the taxpayer meets the definition of “operator” that triggers IDC eligibility.

For Kern County operators, IDC audits often run together with percentage depletion audits — the IRS opens one and uses it as the entry point to examine the related deductions. Having a clear, year-by-year record of what was claimed, the basis for each deduction, and the supporting documentation is the foundation of any defense.

Royalty Income Reporting

Royalty income from oil and gas leases is reported on Schedule E and is subject to self-employment tax considerations that depend on whether the royalty owner is passive or active in the operation. The IRS matches 1099-MISC and 1099-NEC information returns against reported royalty income, and discrepancies trigger automated notices — and sometimes examinations. Royalty owners who received payments from multiple operators and who rely on year-end summaries without reconciling to their actual lease agreements frequently have reporting gaps that survive unnoticed until an audit.

CDTFA Oil Extraction Excise Tax

California’s oil extraction excise tax — administered by CDTFA under Revenue and Taxation Code § 3455 et seq. — is assessed on crude oil and natural gas produced in California at a rate determined annually by the Department of Conservation. The tax is separate from sales and use tax, and the CDTFA audits production records to verify that reported volumes match actual production. Discrepancies between production reports filed with the Division of Oil, Gas, and Geothermal Resources and CDTFA returns are a common audit trigger.

Agriculture, Farming Income, and Payroll Tax

Agriculture is Kern County’s other major industry — the region produces grapes, almonds, citrus, and a range of other crops — and farm operators face a distinct set of tax issues.

Farming income reporting on Schedule F is straightforward in principle but complex in practice for larger operations: crop insurance proceeds, commodity price fluctuations, IRC § 1031 land exchanges, and the timing of deductions for seed, fertilizer, and equipment can all create audit exposure. The IRS examines farming operations for cash-basis accounting irregularities, particularly where large expense deductions in one year are followed by relatively low income in the next.

Farmworker payroll tax compliance is one of the more frequently audited areas for Kern County agricultural employers. The EDD audits farm labor contractors and direct employers for proper classification of seasonal workers, correct wage reporting on Forms W-2 and 941, and whether workers paid as day laborers through a farm labor contractor are actually employees of the grower. Trust Fund Recovery Penalty assessments — personal liability under IRC § 6672 for business owners who fail to remit payroll taxes — follow agricultural payroll tax audits with some regularity.

For small farming operations that pay workers primarily in cash and rely on a local tax preparer, the risk is compounded by errors in the underlying returns. An IRS examiner who finds cash payment records that do not match Form 941 payroll filings has the basis for an indirect method audit — which shifts the burden to the taxpayer to reconstruct income from all available sources. See our practice page on payroll tax defense.

ERC Exposure for Bakersfield Businesses

The Employee Retention Credit (ERC) was available to businesses that experienced government-ordered shutdowns or significant revenue declines in 2020 and 2021, and it was particularly relevant for Kern County businesses in agriculture, hospitality, and food service. Many Bakersfield businesses that claimed ERC based on 2020 supply chain disruptions and operational restrictions are now receiving IRS examination notices.

The IRS ERC audit program focuses on two categories of claims: those filed through aggressive third-party promoters who applied broad eligibility theories without adequate supporting documentation, and legitimate claims that have documentation gaps because the employer relied on payroll processor summaries rather than actual government order analysis.

In both cases, the defense starts with the same question: did this business actually qualify under IRC § 3134 for the periods claimed, and can that be demonstrated from the records that existed at the time? If the answer is yes and the documentation is reconstructable, the audit is manageable. If the eligibility analysis was genuinely fabricated by a promoter, the approach is different — and needs to start before the IRS issues a formal disallowance. See our full ERC audit practice page for ERC audit defense.

How IRS Enforcement Works in Kern County

There is no dedicated IRS field office in Bakersfield. IRS Automated Collection System (ACS) handles routine Kern County accounts centrally. IRS revenue agents conducting field examinations and revenue officers working collection cases travel from Fresno or Los Angeles. That means the timeline for an IRS field audit in Kern County is often slower than in a major metropolitan area — but it also means that when an agent does show up, the matter is serious enough to have warranted the travel.

Federal tax litigation for Kern County taxpayers is heard in the Eastern District of California. Tax Court cases are set for trial in either Fresno or Sacramento, depending on the Tax Court’s calendar for that term. Federal criminal tax cases — prosecuted by the DOJ Tax Division — go to the Eastern District’s Fresno Division courthouse.

For Bakersfield businesses that receive IRS correspondence — a CP2000 notice, a 30-day letter, or a notice of examination — the practical challenge is distance from a major metro where experienced tax counsel is concentrated. That is the straightforward reason why working with a California-statewide attorney who handles these matters remotely makes sense. The geographic gap is not an obstacle; most of the work in a federal tax case happens in writing and over the phone.

Representative Matters

Each matter is different, and past results do not guarantee any particular outcome. The following are representative of the types of cases we handle for Kern County clients.

How Bakersfield Clients Work with Sam

Yes, Sam handles Kern County clients remotely from San Diego. Most of the work in a tax case — IRS correspondence, document production, communication with the examiner or revenue officer, preparation of legal arguments — happens in writing and over the phone. Geographic proximity to Bakersfield does not change the quality of the representation or the attorney’s ability to advocate for you before the IRS or in California proceedings.

The typical workflow for a Kern County client: an initial phone or video call to go through what you are facing and what the realistic options look like. If it makes sense to move forward, we execute an engagement agreement and a Form 2848 Power of Attorney. From there, I communicate directly with the IRS, CDTFA, or EDD on your behalf. You hear from me when there is something that requires your input or decision — not a weekly call to say nothing has changed.

For IRS Tax Court proceedings or federal court appearances in the Eastern District’s Fresno Division, I travel. For meetings with Bakersfield clients who want to discuss their matter in person, we can arrange that either at a convenient Bakersfield location or at our San Diego office at 12636 High Bluff Drive, Suite 300.

If you have received an IRS notice, an EDD audit letter, or a CDTFA assessment and are not sure what to do next, the free 15-minute call is the right place to start.