Written by Tax due diligence is an essential aspect of M&A that is often ignored. Because the IRS is unable to conduct a tax audit of every company in the United States, mistakes or oversights in the M&A process could result in severe penalties. A thorough and well-organized process will aid in avoiding these penalties.
Tax due diligence is typically the review of previous tax returns, as well as documents pertaining to information from current as well as past years. The scope of the audit depends on the nature of the transaction. Acquisitions of entities, for instance, are more likely to expose a company than asset purchases because companies that are taxable targets could be jointly and jointly liable for the tax liabilities of the participating corporations. Other factors include whether or not an entity that is tax-exempt has been included in the unconsolidated federal tax returns as well as the amount of documentation that is related to transfer pricing for intercompany transactions.
Reviewing prior tax years can also reveal if the company is in compliance regulatory requirements as well as a few red flags indicating possible tax abuse. These red flags could include, but aren’t only:
The final stage of tax due diligence is comprised of interviews with the top management. These interviews are designed to answer any questions the buyer might have and to clarify any issues that might have an impact on the deal. This is particularly important when purchasing companies that have complex structure or uncertain tax positions.