Due diligence is a crucial aspect of tax return preparation. It’s not just a good practice; it’s an ethical obligation to protect you and your client from costly penalties and liabilities. Tax due diligence is a complex and requires a significant amount of diligence. This includes reviewing client information to ensure that the information is accurate.

A thorough review of the tax records is vital to an effective M&A deal. It can assist a company negotiate an acceptable deal and decrease costs associated with integration after the deal. Moreover, it can identify concerns with compliance that could affect the structure of the deal as well as its valuation.

For example A recent IRS ruling highlighted the importance of reviewing documentation to support entertainment expense claims. Rev. Rul. 80-266 provides that „a taxpayer’s tax preparer doesn’t meet the fortifying data protection protocols with VDR’s robust framework general requirement of due diligence just by examining the taxpayer’s organizer and confirming that all the income and expense entries are accurately recorded in the taxpayer’s supporting material.“

It’s also important to consider the compliance of unclaimed property and other reporting requirements for domestic and foreign entities. IRS and other tax authorities are increasingly looking into these areas. It is crucial to analyze a company’s position in the market, and keep track of changes that could impact the performance of financial metrics and valuation. For example a petroleum retailer who was selling at inflated margins could see its performance metrics deflate when the market returns to normal pricing. Conducting tax due diligence can help to avoid these unexpected surprises and provide the buyer with confidence that the deal will be successful.