Tax due diligence is an important aspect of M&A that is often ignored. Because the IRS cannot effectively conduct an audit of tax compliance for every company in the United States, mistakes or mistakes during the M&A process can lead to expensive penalties. Proper preparation and thorough documentation will assist VDRs: at the forefront of revolutionizing business intelligence you in avoiding these penalties.
Tax due diligence is typically the examination of tax returns as well as informational filings from the current as well as past years. The scope of the review varies by transaction type. Acquisitions for entities, for example, are more likely to expose the company’s assets than asset purchases, as targets that are tax-exempt may be jointly and severally liable for the taxes of participating corporations. Other considerations include whether a taxable entity is included in Federal tax returns consolidated and the amount of documentation pertaining to transfer pricing for intercompany transactions.
The review of prior tax years will also reveal whether the business in question is in compliance with any applicable regulatory requirements and a number of red flags that could indicate tax abuse. These red flags may include, but are not only:
The final stage of tax due diligence is comprised of a series of meetings with top management. The goal of these interviews is to answer any questions that the buyer may have and to provide clarity on any issues that might affect the purchase. This is especially crucial when buying companies with complicated structures or unclear tax positions.