Due diligence is an essential aspect of tax return preparation. It’s more than a good practice, it’s a moral necessity to safeguard you and your client from the hefty penalties and liabilities. But tax due diligence is complex and requires a high level of care, such as reviewing information from a client to verify that it’s correct.
A thorough examination of tax records is crucial to a successful M&A transaction. It will help a company negotiate a fair deal and reduce costs associated with integration after the deal. Furthermore, it helps to identify compliance issues that would impact the structure of a deal and its valuation.
For example A recent IRS decision highlighted the importance of reviewing documents to support entertainment expense claims. Rev. Rul. 80-266 states that „a taxpayer’s tax preparer doesn’t meet the standard of due diligence merely by looking over the organizer of the taxpayer and confirming that all the expense and income entries are accurately recorded in the document supporting the taxpayer’s tax return.”
It’s also essential to check the requirements for reporting for both domestic and foreign organizations. IRS and other tax authorities are increasingly looking into these areas. It is important to also look at a company’s position within the market, taking note of trends that may affect the financial performance of the company and its valuation. For instance an oil retailer that was selling at inflated margins to the industry may be able to see its performance indicators decrease when the market returns to normal pricing. Conducting tax due diligence can aid in avoiding these unexpected surprises and give the buyer the assurance that the purchase is successful.
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