Tax due diligence (TDD) is among the least studied – but yet crucial – elements of M&A. The IRS can’t audit every company in the United States. Therefore, mistakes and oversights made during the M&A processes click for more info about Paperless board meetings guide could result in significant penalties. Fortunately, a thorough preparation and thorough documentation can help avoid these penalties.
Tax due diligence generally refers to the review of previous tax returns as well as other informational filings from current and historic periods. The scope of the review differs based on the type of transaction. For instance, acquisitions of entities typically involve greater potential exposure than asset purchases due to the fact that taxable target entities can be subject to joint and multiple obligation for taxes of all participating corporations. Moreover, whether a taxable target has been included in the federal income tax returns that are consolidated as well as the quality of documents relating to transfer pricing in intercompany transactions, are additional factors that can be scrutinized.
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 evasion. These red flags could include, but not be only:
The final stage of tax due diligence is comprised of interviews with senior management. These meetings are designed to answer any questions the buyer might have and clarify any issues that might impact the deal. This is especially important when acquiring companies with complex structures or unclear tax positions.
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