Due diligence is a vital element of preparing a tax return. It’s not only a best method, it’s an ethical imperative that shields both you and your clients from the hefty penalties and liabilities. Tax due diligence is complicated and requires a significant amount of attention. This includes reviewing the client’s information to ensure accuracy.
A thorough examination of tax records is vital to the success of an M&A transaction. It can assist a business negotiate a fair price, and also reduce the cost of integration after the deal. Additionally, it can help identify compliance issues that would impact the structure of the deal and its valuation.
A recent IRS ruling, for instance it stressed the importance of reviewing documents to support entertainment expense claims. Rev. Rul. 80-266 states that “a taxpayer’s tax preparer doesn’t meet the general standard of due diligence simply by reviewing the taxpayer’s organizer and confirming that all the entries for income and expenses are accurately recorded in the taxpayer’s supporting documents.”
It’s also essential to review the reporting requirements for both foreign and domestic organizations. IRS and other tax authorities are increasingly looking into these areas. It is also necessary to evaluate a company’s standing in the marketplace and observe patterns that could affect financial performance metrics and valuation. For example an oil retailer that was selling at inflated industry margins may have its performance metrics decrease after the market returns to normal pricing. Performing tax due diligence can aid in avoiding these unexpected surprises and provide the buyer with the confidence that the transaction will go smoothly.