Tax due diligence is an essential aspect of M&A that is often left unnoticed. The IRS cannot audit every business in the United States. Therefore, errors and oversights made during the M&A processes could result in massive penalties. A well-planned preparation and detailed documentation will ensure that you don’t incur these penalties.
As a general rule tax due diligence covers the review of previously filed tax returns as well as the review of current and historical informational filings. The scope of the review depends on https://allywifismart.com/a-comprehensive-list-of-vdr-software-providers/ the nature of the transaction. Acquisitions for entities, for example are more likely to expose the company’s assets than asset purchases, as companies that are taxable targets could be jointly and severally responsible for the tax liabilities of participating corporations. Other considerations include whether an entity that is tax-exempt has been included on the combined federal tax returns and the amount of documentation pertaining to transfer pricing for intercompany transactions.
The review of prior tax years will also show whether the business in question is in compliance with the applicable regulations and some red flags that indicate possible tax fraud. These red flags could include, but not be specific to:
The final phase of tax due diligence is comprised of interviews with the top management. These interviews are designed to answer any questions the buyer may have and to clarify any issues that might have an impact on the deal. This is especially crucial in acquisitions that involve complex structures or unclear tax positions.