Tax due diligence (TDD) is one of the least studied – but yet most critical – aspects of M&A. Because the IRS cannot practically conduct an audit of all tax-paying company in the United States, mistakes or mistakes during click for more info about Paperless board meetings guide the M&A process can result in expensive penalties. Fortunately, proper preparation and complete documentation can help you avoid these penalties.
Tax due diligence is generally the review of previous tax returns, as well as informational filings from current and past periods. The scope of the audit varies dependent on the nature of transaction. For example, entity acquisitions generally have a greater risk of exposure than asset purchases, given that taxable target entities can be susceptible to joint and several liability for the taxes of all participating corporations. Also, whether a tax-exempt target is listed in the consolidated federal income tax returns and whether it has the proper documentation regarding transfer pricing related to intercompany transactions, are additional aspects that could be examined.
The review of prior tax years will also determine if the business in question is in compliance with any applicable regulatory requirements, as well as a number of red flags that could indicate tax abuse. These red flags could include, but not be only:
Interviews with the top management are the final step in tax due diligence. These meetings are designed to answer any queries the buyer may have and to resolve any issues that may impact the deal. This is especially important when acquiring companies with complex structures or uncertain tax positions.