Tax due diligence (TDD) is among the least studied – but yet most critical – aspects of M&A. The IRS can’t audit every company in the United States. Therefore, mistakes and oversights that occur during the M&A processes could result in massive penalties. Fortunately, a thorough preparation and thorough documentation can help avoid these penalties.
As a general rule tax due diligence is the review of previous tax returns as well as the review of current and historical informational filings. The scope of the audit differs dependent on the nature of transaction. For example, entity acquisitions generally carry a greater risk than asset purchases, given that taxable target entities can be susceptible to joint and several tax liability of all participating corporations. Other factors include whether or not the tax-paying entity has been included on the Federal tax returns consolidated and the amount of documentation regarding the transfer pricing of intercompany transactions.
A review of tax years prior to the year can reveal whether the company is complying with the regulations and also a few red flags indicating possible tax evasion. These red flags may include, but not be only:
Interviews with the top management are the final step in tax due diligence. The purpose of these meetings is to answer any questions that the buyer may have and also to provide clarity on any issues that might influence the sale. This is particularly important when purchasing companies that have complex structures or unclear tax https://allywifismart.com/paperless-board-meeting-guide-make-your-transition-into-a-digital-board-room/ positions.
