Due diligence is a crucial element of tax return preparation. It’s not just a good practice, it is an ethical obligation that protects both you and your clients from costly penalties and liability. However, tax due diligence is complex and requires a great level of care, such as checking the information of a customer to ensure that it’s true.
A thorough examination of tax records is crucial to a successful M&A deal. It will help a company negotiate a fair deal and reduce costs associated with integration after the deal. Furthermore, it helps to identify issues with compliance that could impact the structure of a deal and its valuation.
A recent IRS ruling, for instance it stressed the importance of looking over documents to support entertainment expense claims. Rev. Rul. 80-266 provides that „a preparer does not satisfy the standard of due diligence by simply examining the taxpayer’s organizer and confirming that all of the entries for expenses and income are accurately reported in taxpayer’s supporting documents.”
It’s also important to consider the compliance of unclaimed property and other reporting requirements for domestic and foreign organizations. These are subjects that are increasingly under scrutiny by the IRS and other tax authorities. It is also important to look at a company’s position within the market, and take note of changes that could impact financial performance metrics and valuation. For example, a petroleum retailer that was selling at inflated industry margins may see its performance metrics deflate when the market returns to normal pricing. Tax due diligence can avoid these unexpected surprises and also give the buyer confidence that the deal is likely to be successful.
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