Due diligence is a vital element of preparing a tax return. It’s not just a good practice, but an ethical imperative that shields both you and your clients from costly penalties and liability. Tax due diligence can be a complicated, and requires a great deal of care. This involves reviewing client data to ensure the accuracy of the information.
A thorough examination of tax records is essential for an effective M&A deal. It will help a company negotiate an acceptable deal and decrease post-deal integration costs. It also helps identify concerns regarding compliance that could dropbox virtual data room review impact the structure of a deal or its valuation.
A recent IRS ruling, for example, stressed the importance of reviewing 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 inspecting the organizer of the taxpayer and confirming that all of the income and expense entries are accurately reported in document supporting the taxpayer’s claim.“
It’s also essential to review the reporting requirements for both foreign and domestic entities. IRS and other tax authorities are more and more investigating these areas. It is also important to analyze a company’s performance in the marketplace and observe trends that could affect financial performance metrics and valuation. For instance a petroleum retailer that was selling at an overpriced industry margins may observe its performance metrics diminish when the market returns to normal pricing activity. Conducting tax due diligence can help avoid these unexpected surprises and give the buyer the confidence that the transaction is successful.