Tax Due Diligence in M&A Transactions

Tax Due Diligence in M&A Transactions

Tax due diligence is a crucial aspect of M&A that is often overlooked. The IRS cannot audit every business in the United States. Therefore, mistakes and oversights made during the M&A processes can lead to severe penalties. Fortunately, proper preparation and complete documentation can help you avoid these penalties.

In general tax due diligence covers the review of prior filed tax returns as well as current and historical informational filings. The scope of the audit depends on the nature of the transaction. Acquisitions of entities, for instance, are more likely to expose the company to liability than asset purchases because target companies that are tax deductible may be jointly and severally responsible for the tax liabilities of the participating corporations. Additional factors include whether a taxable entity has been included in the unconsolidated federal tax returns as well as the amount of documentation pertaining to the transfer pricing of intercompany transactions.

Reviewing prior tax years can help determine if the company is in compliance the regulations and also a few red flags dropbox virtual data room review that indicate possible tax evasion. These red flags could include, but aren’t restricted to:

The final phase of tax due diligence is comprised of interviews with senior management. These meetings are designed to answer any questions that the buyer might have and clarify any issues that might impact the deal. This is especially important when purchasing companies that have complex structures or uncertain tax positions.