Due diligence is an essential part of tax preparation. It’s more than a good practice; it’s an ethical obligation to protect you and your client from costly penalties and liabilities. Tax due diligence can be a complicated and requires a significant amount of diligence. This includes reviewing the client’s information to ensure accuracy.
A thorough examination of tax records is crucial to an effective M&A deal. It can help a business negotiate an equitable deal and cut down on the costs of integration after the deal. Furthermore, it can reveal issues with compliance that could impact the deal structure and valuation.
A recent IRS ruling, for instance it stressed the importance of studying documents to support entertainment expense claims. Rev. Rul. 80-266 provides that “a preparer is not able to meet the general standard of due diligence merely by reviewing the taxpayer’s organizer and confirming that all of the expense and income entries are accurately reported in taxpayer’s supporting material.”
Also, it’s crucial to examine the reporting requirements for both domestic and foreign organizations. IRS and other tax authorities are constantly investigating these areas. It is also necessary to assess a company’s position in the marketplace, noting trends that could affect the performance of its financials and valuation. For example a petroleum retailer that was selling at an overpriced margins could be able to see its performance indicators decrease once the market returns to normal pricing. Conducting tax due diligence can help avoid these unexpected surprises and provide the buyer with the assurance that the transaction is successful.
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