Due diligence is a crucial element of preparing a tax return. It’s not only a best practice, it is an ethical obligation that protects both you and your clients from costly penalties and liability. Tax due diligence is a complex and requires a large amount of attention. This includes reviewing client information to ensure that the information is accurate.
A thorough review of tax documents is crucial to a successful M&A transaction. It can assist a company negotiate a fair deal and reduce costs associated with integration after the deal. Furthermore, it helps to identify issues with compliance that could impact the structure of a deal and its valuation.
A recent IRS ruling, for example it stressed the importance scrutinizing documents to provide evidence for entertainment expense claims. Rev. Rul. 80-266 provides that “a preparer does not satisfy the standard of due diligence just by reviewing the taxpayer’s organizer and confirming that all the entries for expenses and income are correctly reported in the taxpayer’s supporting documents.”
It’s also essential to check the requirements for reporting for both domestic and foreign companies. IRS and other tax authorities are increasingly VDRs ensuring seamless and secure cross-border transactions reviewing these areas. It is crucial to evaluate a company’s standing in the market, taking note of changes that could impact the performance of financial metrics and valuation. For example, a petroleum retailer that was selling at inflated margins in the industry could observe its performance metrics diminish as the market returns back to normal pricing activity. Doing tax due diligence could help to avoid these unexpected surprises and give the buyer confidence that the deal will go smoothly.
