Due diligence is an essential aspect of preparing a tax return. It’s more than just a good practice, it’s a moral imperative to protect you and your client from costly penalties and liabilities. Tax due diligence is complex, and requires a great deal of care. This includes reviewing the client’s information to ensure the accuracy of the information.
A thorough examination of tax records is essential for the success of an M&A deal. It can help a company negotiate a fair price and reduce the costs of integration after a deal. It can also help identify concerns regarding compliance that could impact the structure of a deal or its valuation.
For example an recent IRS ruling stressed the importance of examining documentation in support of entertainment expense claims. Rev. Rul. 80-266 states that «a preparer does not satisfy the general standard of due diligence by simply reviewing the taxpayer’s organizer and confirming that all of the income and expense entries are accurately reported in taxpayer’s supporting material.»
It is also crucial to look into the status of unclaimed property compliance as well as other reporting requirements for both domestic and foreign organizations. IRS and other tax authorities are constantly scrutinizing these areas. It is also important to analyze a company’s performance in the marketplace, noting changes that could impact the performance of its financials and valuation. For instance, if an oil retailer was selling at a higher margin in the market its performance metrics could be inflated when the market returns to normal pricing. Performing tax due diligence can help to avoid these unexpected surprises and provide the buyer with the assurance that the transaction will succeed.