Due diligence is a critical part of tax preparation. It’s not just a good practice; it’s an ethical obligation to protect you and your client from costly penalties and liabilities. Tax due diligence is complicated and requires a significant amount of care. This involves reviewing client data to ensure the accuracy of the information.
A thorough review of the tax records is vital to a successful M&A deal. It can aid a business negotiate a fair deal and reduce post-deal integration costs. Moreover, it can identify issues with compliance that could impact the structure of the deal as well as its valuation.
A recent IRS ruling, for instance it stressed the importance of scrutinizing documents to back up entertainment expense claims. Rev. Rul. 80-266 provides that “a preparer cannot meet the general requirement of due diligence simply by examining the taxpayer’s organizer and confirming that all the entries for expenses and income are accurately reported in taxpayer’s supporting material.”
Also, it’s crucial to look over the reporting requirements for both foreign and domestic entities. These are areas of increasing scrutiny by the IRS and other tax authorities. It is also essential to analyze a company’s performance on the market and identify changes that could impact financial performance metrics and valuation. For example a petroleum retailer that was selling at inflated margins to the industry may observe its performance metrics diminish after the market returns to normal pricing activity. Conducting tax due diligence can help avoid these unexpected surprises and give the buyer the assurance that the transaction will go smoothly.
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