Due diligence is a crucial part of tax return preparation. It’s not just a good practice, it is an ethical obligation that protects both you and your clients from costly penalties and liabilities. Tax due diligence can be complicated and requires a high degree of care, including the review of information provided by a client to ensure it’s accurate.
A thorough review of the tax records is vital to a successful M&A deal. It will help a company negotiate an acceptable price and decrease the cost of post-deal integration. Moreover, it can identify compliance issues that would impact the structure of the deal and its valuation.
A recent IRS ruling, for example, stressed the importance of reviewing documents to justify entertainment expense claims. Rev. Rul. Rul.
It is also crucial to look into the status of unclaimed property compliance as well as other reporting requirements for both domestic and foreign organizations. IRS and other tax authorities are increasingly reviewing these areas. It is also essential to examine a company’s position on the market and identify developments that could impact the performance of its financials and valuation. For instance a petroleum retailer who was selling at inflated margins could have its performance metrics decrease 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.
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