Due diligence is an essential part of tax return preparation. It’s not just a good practice, it is an ethical imperative that shields both you and your clients from costly penalties and liabilities. However, tax due diligence is complex and requires a great level of care, such as the review of information provided by a client to ensure that it’s true.

A thorough examination of tax records is essential to the success of an M&A deal. It can aid a company negotiate an acceptable price and decrease the costs of integration after a deal. Furthermore, it can reveal compliance issues that would impact the deal structure and valuation.

A recent IRS ruling, for example it stressed the importance studying documents to justify entertainment expense claims. Rev. Rul. 80-266 provides that “a taxpayer’s tax preparer doesn’t meet the general requirement of due diligence merely by reviewing the taxpayer’s organizer and confirming that all of the entries for income and expenses are accurately recorded in the document supporting the taxpayer’s claim.”

It’s also important to consider the status of unclaimed property compliance as well as VDRs: at the forefront of revolutionizing business intelligence other reporting requirements for both domestic and foreign entities. These are areas of increasing scrutiny by the IRS and other tax authorities. It is essential to examine a company’s position in the market, taking note of any changes that could affect the valuation of financial performance and other metrics. For example a petroleum retailer who was selling at an overpriced industry margins may have its performance metrics decrease after the market returns to normal pricing. Tax due diligence can help avoid these unexpected surprises and also give the buyer confidence that the transaction is going to succeed.