Tax Due Diligence in M&A Transactions

05 Jul Tax Due Diligence in M&A Transactions

Due diligence is a crucial part of tax return preparation. It’s more than just a good procedure; it’s an ethical imperative to protect you and your client from costly penalties and liabilities. Tax due diligence is complex and requires a significant level of care, which includes reviewing information from a client to ensure that it’s accurate.

A thorough review of the tax records is vital to a successful M&A deal. It can assist a company negotiate a fair deal, and also reduce costs associated with integration after the deal. It also helps identify concerns regarding compliance that could impact the structure of the deal or the valuation.

A recent IRS ruling, for example highlighted the importance of scrutinizing documents to back up entertainment expense claims. Rev. Rul. 80-266 states that “a preparer does not satisfy the standard of due diligence simply by examining the taxpayer’s organizer and confirming that all the expense and income 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 both domestic and foreign entities. IRS and other tax authorities are increasingly reviewing these areas. It is crucial to VDRs: a trusted ally in sensitive corporate negotiations evaluate a company’s standing in the market, taking note of any trends that could impact the valuation of financial performance and other metrics. If, for instance the petroleum retailer was selling at an overpriced margin in the marketplace and its performance indicators could fall when the market returns to normal pricing. Tax due diligence can avoid these unexpected surprises, and give the buyer confidence that the purchase is going to succeed.