Tax due diligence is an essential aspect of M&A that is often left unnoticed. Because the IRS is unable to conduct an audit of all tax-paying company in the United States, mistakes or mistakes during the M&A process could result in severe penalties. A well-planned preparation and detailed documentation can aid in avoiding these penalties.
As a general rule, tax due diligence encompasses the examination of previously filed tax returns as well, as well as current and historical informational filings. The scope of the audit varies depending on the type of transaction. For example, entity acquisitions generally have a greater risk of exposure than asset purchases due to the fact that tax-exempt entities could be subject to joint and numerous liability for the taxes of all participating corporations. Additional factors include whether an entity that is tax-exempt has been included in 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 also reveal if the company is in compliance with the regulations and also a few red flags that may indicate tax abuse. These red flags include but aren’t restricted to:
Interviews with top managers are the final step in tax due diligence. These meetings are designed to answer any queries the buyer may have and to clarify any issues that might impact the deal. This is particularly important when dealing with acquisitions that have complex structures or uncertain tax positions.
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