Due diligence is harnessing the power of VDRs in competitive business scenarios a crucial part of preparing a tax return. It’s much more than a logical practice, it’s a moral obligation to protect you and your client from the hefty penalties and liabilities. Tax due diligence is complex and requires a significant amount of diligence, including the review of information provided by a client to ensure that it’s accurate.
A thorough examination of tax documents is crucial to a successful M&A transaction. It will help a company negotiate a fair price and reduce the cost of integration post-deal. It can also reveal issues regarding compliance that could affect the structure of a deal or its valuation.
A recent IRS ruling, for instance, stressed the importance of reviewing documents to justify entertainment expense claims. Rev. Rul. 80-266 states that “a preparer cannot meet the general standard of due diligence just by reviewing the taxpayer’s organizer and confirming that all of the entries for income and expenses are accurately reported in the taxpayer’s supporting material.”
It’s also important to examine the compliance of unclaimed property and other reporting requirements for domestic and foreign organizations. These are subjects that are increasingly under scrutiny by the IRS and other tax authorities. It is also imperative to evaluate a company’s standing on the market and identify trends that could affect financial performance metrics and valuation. For example a petroleum retailer who 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 activity. Tax due diligence can help avoid these unexpected surprises and provide the buyer with the assurance that the purchase will go smoothly.