Due diligence is a critical element of tax return preparation. It’s not just a good practice; it’s also an ethical imperative to protect you and your client from the hefty penalties and liabilities. However, tax due diligence is complicated and requires a high level of care, which includes checking the information of a customer to ensure it’s accurate.
A thorough examination of tax records is crucial to a successful M&A transaction. It can help a company negotiate a fair price, and also reduce the cost of post-deal integration. Additionally, it can help identify concerns with compliance that could affect the deal structure and valuation.
A recent IRS ruling, for instance highlighted the importance of reviewing documents to back up entertainment expense claims. Rev. Rul. 80-266 states that “a preparer is not able to meet the general standard of due diligence simply by looking over the organizer of the taxpayer and confirming that all the expense and income entries are accurately recorded in the taxpayer’s supporting documents.”
It’s also important to review the status of unclaimed property compliance as well as other reporting requirements for both domestic and foreign organizations. IRS and other tax authorities are increasingly looking into these areas. It is also important to analyze a company’s position in the market, taking note of trends that may affect the performance of financial metrics and valuation. If, for instance the petroleum retailer was selling at a higher margin within the industry, its performance metrics may be inflated when the market returns to normal pricing. Performing tax due diligence can aid in avoiding these unexpected surprises and give the buyer the assurance that the transaction is successful.
