Tax Due Diligence in M&A Transactions

Tax due diligence (TDD) is one of the least considered – and yet most critical – aspects of M&A. Because the IRS cannot practically conduct an audit of all tax-paying company in the United States, mistakes or oversights in the M&A process could lead to severe penalties. Thankfully, proper preparation and thorough documentation can help avoid these penalties.

Tax due diligence typically involves the review of previous tax returns, as well as informational filings from both current and historic periods. The scope of https://allywifismart.com/a-comprehensive-list-of-vdr-software-providers/ the audit varies dependent on the nature of transaction. Acquisitions of entities, for instance are more likely to expose the company’s assets than asset acquisitions because taxable target companies may be jointly and severally liable for the tax liabilities of participating corporations. Additional factors include whether an entity that is tax-exempt has been included in consolidated federal tax returns and the amount of documentation pertaining to transfer pricing for intercompany transactions.

The review of prior tax years will also reveal whether the company in question is compliant with the regulations applicable to it, as well as several red flags that could indicate tax fraud. These red flags may include, but not be limited to:

Interviews with top management personnel are the final step in tax due diligence. These interviews are designed to answer any questions the buyer might have, and to identify any issues that could affect the transaction. This is particularly important when purchasing companies with complex structures or unclear tax positions.