Tax due diligence is a crucial aspect of M&A that is often overlooked. The IRS cannot audit every business in the United States. Therefore, mistakes and oversights made during the M&A procedures can result in severe penalties. Fortunately, a proper plan and detailed documentation can reduce these penalties.
As a general rule, tax due diligence encompasses the review of previously filed tax returns as well as current and historical informational filings. The vdr secrets scope of the audit varies depending on the type of transaction. For instance, acquisitions of entities typically have greater risk than asset acquisitions, due to that taxable targets may be subject to joint and multiple liability for the taxes of all the participating corporations. Other factors include whether or not the tax-paying entity has been included in the combined federal tax returns and the amount of documentation regarding the transfer pricing of intercompany transactions.
Reviewing tax returns from prior years will also reveal if the target company complies with the regulations applicable to it and also some red flags that indicate possible tax fraud. These red flags could include, but aren’t restricted to:
The final stage of tax due diligence is comprised of a series of meetings with top management. These meetings are designed to answer any questions that the buyer might have and to resolve any issues that may affect the purchase. This is especially important when purchasing companies that have complex structures or unclear tax positions.