Due diligence is a crucial part of preparing a tax return. It’s not just a good practice; it’s an ethical requirement to protect yourself and your client from costly penalties and liabilities. Tax due diligence is complex and requires a good amount of diligence. This includes reviewing the client’s information to ensure the accuracy of the information.
A thorough review of the tax records is essential for the success of an M&A deal. It can assist a business negotiate a fair price, and also reduce the cost of integration post-deal. It can also help identify issues with compliance that could affect the deal structure or valuation.
A recent IRS ruling, for example highlighted the importance of reviewing documents to provide evidence for entertainment expense claims. Rev. Rul. 80-266 provides that “a preparer is not able to meet the general requirement of due diligence simply by inspecting the organizer of the taxpayer and confirming that all of the income and expense entries are accurately recorded in the document supporting the taxpayer’s tax return.”
It’s also important to examine the unclaimed property compliance requirements and other reporting requirements for both domestic and foreign entities. These are areas that are subject to increasing scrutiny by the IRS and other tax authorities. It is also imperative to examine a company’s position in the market, and note extensive list of virtual room software trends that could affect the financial performance metrics and valuation. For instance a petroleum retailer that was selling at an overpriced margins to the industry may be able to see its performance indicators decrease after the market returns to normal pricing. Tax due diligence can assist in avoiding these unexpected surprises and give the buyer the assurance that the transaction is successful.