Tax Due Diligence in M&A Transactions
Tax due diligence is a crucial aspect of M&A that is often left unnoticed. The IRS can’t audit every firm in the United States. Therefore, mistakes and oversights made during the M&A procedures can result in heavy penalties. Proper preparation and thorough documentation can ensure that you don’t incur these penalties.
Tax due diligence typically involves the examination of tax returns as well as other informational filings from current as well as past years. The scope of the audit depends on the nature of the transaction. For instance, entity acquisitions typically involve greater potential exposure than asset purchases, due to the fact that taxable targets may be subject to joint and numerous tax obligations of all corporations participating. Also, whether a tax-exempt target is included in consolidated federal income tax returns, and the sufficiency of transfer pricing documentation related to intercompany transactions are other aspects that could be examined.
Reviewing tax returns from prior years will also reveal if the company in question is compliant with applicable regulatory requirements as well as a number of red flags that indicate possible tax fraud. These red flags could include, but aren’t limited to:
The final phase of tax due diligence is comprised of interviews with top management. The aim of these interviews is to answer any questions the buyer may have and to clarify any issues that might influence the sale. This is especially important in acquisitions that involve complex structures or uncertain tax positions.