Tax Due Diligence in M&A Transactions
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 the cost of penalties and liabilities. Tax due diligence is complicated and requires a large deal of care. This includes reviewing the client’s information to ensure that the information is accurate.
A thorough review of tax records is vital to the success of an M&A transaction. It can aid a company negotiate a fair price, and also reduce the cost of integration after the deal. Furthermore, it helps to identify concerns with compliance that could affect the structure of a deal and its valuation.
For example A recent IRS ruling highlighted the importance of reviewing documents to support entertainment expense claims. Rev. Rul. Rul.
It’s also important to consider unclaimed property compliance and other reporting requirements for both domestic and foreign entities. These are subjects that are increasingly under scrutiny by the IRS and other tax authorities. It is also imperative to evaluate a company’s standing in the marketplace and observe trends that could affect the financial performance of the company and its valuation. If, for instance a petroleum retailer was selling at a high margin in the market and its performance indicators could deflate when the market returns to normal pricing. Performing tax due diligence can help avoid these unexpected surprises and provide the buyer with the vdr secrets confidence that the transaction is successful.