Due diligence is an essential aspect of preparing a tax return. It’s more than a best practice, but an ethical imperative that shields both you and your clients from the cost of penalties and liabilities. Tax due diligence is complicated, and requires a great amount of diligence. This involves reviewing client data to ensure accuracy.
A thorough examination of tax documents is crucial to the success of an M&A transaction. It can assist a company negotiate a fair deal and reduce costs associated with integration after the deal. It can also identify issues regarding compliance that could affect the structure of a deal or its valuation.
A recent IRS ruling, for example highlighted the importance of scrutinizing documents to justify entertainment expense claims. Rev. Rul. 80-266 states that “a preparer cannot meet the standard of due diligence just by inspecting the organizer of the taxpayer and confirming that all the expense and income entries are accurately reported in the taxpayer’s supporting documents.”
It’s also important to review the unclaimed property compliance requirements and other reporting requirements for domestic and foreign organizations. IRS and other tax authorities are constantly scrutinizing these areas. It is also important to look at a company’s position within the market, taking note of any trends that could impact the performance of financial metrics and valuation. For instance a petroleum retailer that was selling at an overpriced margins in the industry could be able to see its performance indicators decrease once the market returns to normal pricing. Doing tax due diligence could assist in avoiding these unexpected surprises and give the buyer the confidence that the transaction is successful.