Due diligence is an essential element of tax return preparation. It’s more than a good practice; it’s also an ethical requirement to protect yourself and your client from the hefty penalties and liabilities. However, tax due diligence is complex and requires a significant level of care, such as reviewing information from a client to ensure that it’s true.
A thorough review of tax documents is crucial to a successful M&A transaction. It will help a company negotiate an appropriate price and cut the cost of integration after the deal. It can also help identify issues regarding compliance that could affect the structure of the deal or the valuation.
For example, a recent IRS ruling highlighted 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 general requirement of due diligence merely by examining the taxpayer’s organizer and confirming that all of the entries for income and expenses are accurately reported in taxpayer’s supporting material.”
Also, it’s crucial to check the requirements for reporting for both foreign and domestic organizations. These are areas that are subject to increasing scrutiny by the IRS and other tax authorities. It is also important to evaluate a company’s standing in the market and be aware of any trends that could impact the performance of financial metrics and valuation. For example a petroleum retailer who was selling at an overpriced margins to the industry may be able to see its performance indicators decrease once the market returns to normal pricing. Tax due diligence can help prevent these unexpected surprises and give the buyer extensive list of virtual room software the confidence that the transaction is going to succeed.