06 Jul Tax Due Diligence in M&A Transactions

Due diligence is a critical part of tax return preparation. It’s more than a best practice, it is an ethical obligation that protects both you and your clients from the hefty penalties and liabilities. Tax due diligence can be a complicated and requires a good amount of care. This includes reviewing the client’s 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 equitable deal and cut down on post-deal integration costs. It can also help identify concerns regarding compliance that could impact the structure of the deal or the valuation.

A recent IRS ruling, for example it stressed the importance looking over documents to justify entertainment expense claims. Rev. Rul. 80-266 provides that «a preparer cannot meet the standard of due diligence merely by reviewing the taxpayer’s organizer and confirming that all the entries for income and expenses are accurately reported in the taxpayer’s supporting material.»

It’s data room analytics: transforming the landscape of M&A deals also important to review the compliance of unclaimed property and other reporting requirements for domestic and foreign entities. These are areas that are subject to increasing scrutiny by the IRS and other tax authorities. It is important to also analyze a company’s position in the market, and take note of trends that may affect financial performance metrics and valuation. For instance a petroleum retailer who was selling at an overpriced margins could observe its performance metrics diminish as the market returns back to normal pricing activity. Performing tax due diligence can help avoid these unexpected surprises and provide the buyer with the confidence that the transaction will go smoothly.