Due diligence is an essential part of preparing a tax return. It’s more than a good practice, it’s a moral obligation to protect you and your client from the hefty penalties and liabilities. Tax due diligence is complex and requires a good amount of diligence. This includes reviewing the client’s information to ensure accuracy.
A thorough review of the tax records is crucial to a successful M&A deal. It can assist a company negotiate an acceptable deal and decrease the costs of 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 it stressed the importance of scrutinizing documents to justify entertainment expense claims. Rev. Rul. 80-266 provides that «a preparer is not able to meet the general requirement of due diligence merely by inspecting the organizer of the taxpayer and confirming that all the income and expense entries are accurately recorded in the document supporting the taxpayer’s tax return.»
It is also crucial to look into the status of unclaimed property compliance as well as other reporting requirements for domestic and foreign entities. These are areas that are subject to increasing scrutiny by the IRS and other tax authorities. It is also essential to assess a company’s position on the market and identify patterns that could affect the financial performance of the company and its valuation. For example an oil retailer that was selling at an overpriced margins could observe its performance metrics diminish once the market returns to normal pricing. Tax due diligence can avoid these unexpected surprises and give the buyer the confidence that the deal is going to be successful.
