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Due diligence is a vital part of preparing a tax return. It’s more than just a good practice; it’s also an ethical imperative to protect you and your client from costly penalties and liabilities. However, tax due diligence is complex and requires a significant level of care, which includes reviewing information from a client to verify that it’s correct.
A thorough examination of tax records is vital to a successful M&A transaction. It can aid a business negotiate an equitable deal and cut down on costs associated with integration after the deal. It can also reveal issues regarding compliance that could affect the structure of the deal or the valuation.
A recent IRS ruling, for instance highlighted the importance of reviewing documents to justify entertainment expense claims. Rev. Rul. 80-266 provides that “a preparer does not satisfy the general requirement of due diligence merely by looking over the organizer of the taxpayer and confirming that all the income and expense entries are correctly reported in the document supporting the taxpayer’s claim.”
It’s also important to consider unclaimed property compliance and other reporting requirements for both domestic and foreign organizations. These are areas of increasing scrutiny by the IRS and other tax authorities. It is also imperative to assess a company’s position in the market, and note trends that could affect financial performance metrics and valuation. If, for instance, the petroleum retailer was operating at a higher margin in the marketplace the performance metrics of its business could be inflated when the market returns to normal pricing. Performing tax due diligence can aid in avoiding these unexpected surprises and provide the buyer with the assurance that the purchase will be successful.