Due diligence is a crucial part of preparing a tax return. It’s more than a best practice, it is an ethical requirement that safeguards both you and your clients from costly penalties and liability. Tax due diligence is complicated and requires a high degree of care, including the review of information provided by a client to ensure it’s accurate.
A thorough review of tax records is essential to a successful M&A transaction. It will help a company negotiate a fair deal, and also reduce costs associated with integration after the deal. Moreover, it can identify compliance issues that could affect the structure of a deal and its valuation.
For instance, a recent IRS ruling highlighted the importance of examining documentation to support entertainment expense claims. Rev. Rul. 80-266 states that “a preparer cannot meet the standard of due diligence just by examining the taxpayer’s organizer and confirming that all of the expense and income entries are accurately recorded in the taxpayer’s supporting material.”
It’s also essential to examine the reporting requirements for both domestic and foreign companies. These are areas that are under increasing scrutiny by the IRS and other tax authorities. It is crucial to analyze a company’s position in the market and be aware of trends that may affect the valuation of financial performance and other metrics. If, for example, the petroleum retailer was operating at an overpriced margin in the market, its performance metrics may deflate when the market returns to normal pricing. Conducting tax due diligence can help avoid these unexpected surprises and provide the buyer with the confidence that the transaction is successful.