Due diligence is a crucial part of tax return preparation. It’s more than a best practice, but an ethical imperative that protects both you and your clients from the hefty penalties and liabilities. Tax due diligence is a complex, and requires a great amount of attention. This includes reviewing client information to ensure its accuracy.
A thorough review of tax records is crucial to a successful M&A transaction. It will help a company negotiate an equitable deal and cut down on costs associated with integration after the deal. It can also help identify issues with compliance that could affect the structure of a deal or its valuation.
A recent IRS ruling, for instance highlighted the importance of reviewing documents to back up entertainment expense claims. Rev. Rul. 80-266 states that “a preparer does not satisfy the standard of due diligence simply by looking over the organizer of the taxpayer and confirming that all of the expense and income entries are accurately reported in the taxpayer’s supporting documents.”
It is also important to review the reporting requirements for both foreign and domestic organizations. IRS and other tax authorities are constantly investigating these areas. It is important to also analyze a company’s position in the market, taking note of changes that could impact the financial performance of the company and its valuation. If, for instance, a petroleum retailer was selling at inflated margins in the industry and its performance indicators could fall when the market returns to normal pricing. Conducting tax due diligence can help avoid these unexpected surprises and give the buyer the confidence that the transaction will be successful.