Tax due diligence is a crucial aspect of M&A that is often overlooked. The IRS isn’t able to audit every single company in the United States. Therefore, errors and oversights made during the M&A processes could result in significant penalties. A well-planned preparation and detailed documentation will help you avoid these penalties.
As a general rule tax due diligence is the examination of previously filed tax returns, as well as current and historical informational filings. The scope of the audit differs dependent on the nature of transaction. For example, entity acquisitions generally carry a greater risk than asset purchases, due to the fact that tax-exempt entities could be subject to joint and multiple obligation for taxes of all participating corporations. Moreover, whether a taxable target has been listed on the federal income tax returns that are consolidated, and the sufficiency of the documentation on transfer pricing for intercompany transactions are other factors that can be scrutinized.
The review of prior tax years could help determine if the company is in compliance with regulatory requirements, as well as some red flags indicating possible tax fraud. These red flags include but aren’t the only ones:
Interviews with top management are the final step in tax due diligence. The aim of these discussions is to answer any questions the buyer may have and to provide clarity on any outstanding issues that could affect the purchase. This is especially important when acquiring companies with complex structures or https://allywifismart.com/ unclear tax positions.
