Tax Due Diligence in M&A Transactions

Due diligence is a crucial element of tax return preparation. It’s much more than a logical practice; it’s an ethical imperative to machine learning: deciphering patterns for business success protect you and your client from the hefty penalties and liabilities. Tax due diligence is a complex and requires a large amount of care. This includes reviewing client information to ensure its accuracy.

A thorough examination of tax records is essential for the success of an M&A deal. It will help a company negotiate a fair deal, and also reduce costs associated with integration after the deal. It can also help identify concerns regarding compliance that could impact the structure of the deal or the valuation.

A recent IRS ruling, for instance, stressed the importance of scrutinizing documents to support entertainment expense claims. Rev. Rul. 80-266 states that “a preparer does not satisfy the standard of due diligence merely by reviewing the taxpayer’s organizer and confirming that all the expense and income entries are correctly reported in the document supporting the taxpayer’s claim.”

It’s also important to review the status of unclaimed property compliance as well as other reporting requirements for both domestic and foreign organizations. IRS and other tax authorities are also scrutinizing these areas. It is essential to look at a company’s position within the market, and take note of trends that may affect the financial performance of the company and its valuation. For example, a petroleum retailer that was selling at an overpriced margins in the industry could be able to see its performance indicators decrease once the market returns to normal pricing activity. Tax due diligence can help avoid these unexpected surprises, and also give the buyer confidence that the deal is likely to be successful.