Due diligence is a crucial element of tax return preparation. It’s much more than a logical procedure; it’s an ethical requirement to protect yourself and your client from costly penalties and liabilities. Tax due diligence is complex and requires a large amount of care. This includes reviewing the client’s information to ensure accuracy.
A thorough review of the tax records is vital to an effective M&A deal. It can aid a https://allywifismart.com/example-of-tax-preparation-due-diligence/ business negotiate an equitable deal and cut down on costs associated with integration after the deal. It also helps identify concerns regarding compliance that could impact the structure of the deal or even the valuation.
For example, a recent IRS ruling highlighted the importance of examining documentation to support entertainment expense claims. Rev. Rul. 80-266 provides that “a preparer is not able to meet the general requirement of due diligence merely by reviewing the taxpayer’s organizer and confirming that all of the entries for expenses and income are correctly reported in the document supporting the taxpayer’s claim.”
It’s also important to consider unclaimed property compliance and other reporting requirements for domestic and foreign entities. These are subjects that are increasingly under scrutiny by the IRS and other tax authorities. It is also essential to examine a company’s position in the market, and note developments that could impact financial performance metrics and valuation. For example a petroleum retailer that was selling at an overpriced margins in the industry could be able to see its performance indicators decrease as the market returns back to normal pricing. Tax due diligence can help avoid these unexpected surprises and give the buyer the confidence that the purchase is going to be successful.