Tax Due Diligence in M&A Transactions

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Due diligence is an essential aspect of tax return preparation. It’s not only a best practice, but it’s an ethical requirement that safeguards both you and your clients from costly penalties and liabilities. Tax due diligence can be a complicated, and requires a great amount of attention. This includes reviewing client information to ensure that the information is accurate.

A thorough review of tax records is vital to a successful M&A transaction. It will help a company negotiate a fair price, and also reduce the cost of integration post-deal. Moreover, it can identify compliance issues that could affect the structure of a deal and its valuation.

A recent IRS ruling, for example, stressed the importance of studying documents to justify entertainment expense claims. Rev. Rul. Rul.

Also, it’s crucial to look over the reporting requirements for both domestic and foreign companies. These are areas of increasing scrutiny by the IRS and other tax authorities. It is also essential to evaluate a company’s standing in the marketplace, noting patterns that could affect financial performance metrics and valuation. If, for instance, an oil retailer was selling at a high margin in the market, its performance metrics may fall when the market returns to normal pricing. Doing tax due diligence could help to avoid these unexpected surprises and provide the buyer with confidence that the deal is successful.