Due diligence is a critical element of tax return preparation. It’s more than a good practice; it’s an ethical requirement to protect yourself and your client from costly penalties and liabilities. But tax due diligence is complicated and requires a high degree of care, including reviewing information from a client to ensure that it’s true.

A thorough review of the tax records is essential to an effective M&A deal. It can assist a business negotiate an acceptable price and decrease the cost of integration post-deal. It also helps identify issues regarding compliance that could affect the structure of a deal or its valuation.

A recent IRS ruling, for instance it stressed the importance studying documents to provide evidence for entertainment expense claims. Rev. Rul. Rul.

It’s also important to review the status of unclaimed property compliance as well as other reporting requirements for both domestic and foreign entities. These are areas of increasing scrutiny by the IRS and other tax authorities. It is also necessary to examine a company’s position in the market, and note changes that could impact financial performance metrics and valuation. If, for instance an oil retailer was selling at inflated margins within the industry, its performance metrics may be inflated when the market returns to normal pricing. Tax due diligence can avoid these unexpected surprises and provide the buyer with confidence that the deal is going to be successful.

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