Tax due diligence is a crucial aspect of M&A that is often ignored. Because the IRS can’t effectively conduct an audit of each company in the United States, mistakes or oversights in the M&A process can lead to severe penalties. Fortunately, a proper plan https://allywifismart.com/what-are-the-most-secure-virtual-data-room-solutions-in-the-market/ and complete documentation can help you avoid these penalties.
Tax due diligence generally refers to the review of previous tax returns as well as other informational filings from the current and previous periods. The scope of the audit differs according to the type of transaction. For instance, acquisitions of entities generally carry a greater risk than asset purchases, given that taxable targets may be subject to joint and numerous liability for the taxes of all the participating corporations. Additionally, whether a tax-exempt target has been listed on the consolidated federal income tax returns, and the sufficiency of documentation regarding transfer pricing related to intercompany transactions are other factors that may be reviewed.
Examining tax returns from prior years can help determine if the company is complying with the regulations and also some red flags that could indicate tax abuse. These red flags include, but aren’t the only ones:
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 the buyer might have, and to resolve any issues that may impact the deal. This is particularly important when purchasing companies that have complex structure or uncertain tax positions.
