Due diligence is an essential part of preparing a tax return. It’s more than a importance of digital rooms in due diligence good practice, it’s a moral obligation to protect you and your client from the hefty penalties and liabilities. Tax due diligence can be complicated and requires a high level of care, such as reviewing information from a client to ensure that it’s true.
A thorough examination of tax documents is crucial to the success of an M&A transaction. It can aid a business negotiate a fair deal, and also reduce the costs of integration after the deal. Furthermore, it can reveal issues with compliance that could impact the deal structure and valuation.
For example A recent IRS ruling emphasized the importance of reviewing documentation in support of entertainment expense claims. Rev. Rul. 80-266 states that “a taxpayer’s tax preparer doesn’t meet the standard of due diligence simply by examining the taxpayer’s organizer and confirming that all of the entries for income and expenses are accurately recorded in the document supporting the taxpayer’s tax return.”
It’s also important to examine the unclaimed property compliance requirements and other reporting requirements for both domestic and foreign organizations. These are areas that are subject to increasing scrutiny by the IRS and other tax authorities. It is also essential to examine a company’s position in the market, and note trends that could affect the financial performance of the company and its valuation. For example, a petroleum retailer that was selling at inflated margins in the industry could observe its performance metrics diminish when the market returns to normal pricing activity. Conducting tax due diligence can help to avoid these unexpected surprises and give the buyer the assurance that the purchase is successful.