Tax due diligence is a crucial aspect of M&A that is often ignored. The IRS can’t audit every firm in the United States. Therefore, mistakes and oversights that occur during the M&A procedures can result in heavy penalties. A thorough and well-organized process will help you avoid these penalties.
As a general rule tax due diligence is the review of previous tax returns as well, as well as current and historical informational filings. The scope of the audit varies dependent on the nature of transaction. For instance, acquisitions of entities, are more likely to expose the company’s assets than asset purchases because targets that are tax-exempt may be jointly and jointly liable for the taxes of participating corporations. Other factors include whether a taxable entity has been included in the unconsolidated federal tax returns as well as the amount of documentation pertaining to the transfer pricing of intercompany transactions.
A review of tax years prior to the year can reveal whether the firm harnessing the power of VDRs in competitive business scenarios is in compliance with regulations as well as a few red flags that could indicate tax abuse. These red flags may include, but need not be restricted to:
The final phase of tax due diligence consists of a series of meetings with top management. The aim of these discussions is to answer any questions that the buyer might have, and also to provide clarity on any issues that are not resolved that could impact the deal. This is especially important in acquisitions that involve complex structures or unclear tax positions.