Tax due diligence (TDD) is one of the least thought of – and yet the most crucial – aspects of M&A. Because the IRS can’t effectively conduct an audit of tax compliance for every company in the United States, mistakes or oversights in the M&A process could lead to expensive penalties. Thankfully, proper preparation and complete documentation can help you avoid these penalties.
Tax due diligence is generally the review of previous tax returns as well as other informational filings from the current and previous periods. The scope of the audit varies depending on the type of transaction. Acquisitions for entities, for example are more likely to expose a company than asset purchases because companies that are taxable targets could be jointly and severally liable for the tax liabilities of participating corporations. Additional factors include whether a tax-exempt entity is included in consolidated federal tax returns and the amount of documentation regarding data room analytics: transforming the landscape of M&A deals transfer pricing for intercompany transactions.
The review of prior tax years will also determine if the target company complies with any applicable regulatory requirements as well as a variety of red flags indicating possible tax fraud. These red flags could include, but need not be specific to:
Interviews with top management are the final step in tax due diligence. These meetings are designed to answer any questions that the buyer might have and resolve any issues that may affect the purchase. This is especially important in acquisitions involving complicated structures or uncertain tax positions.
