Tax due diligence (TDD) is among the most overlooked – and yet one of https://allywifismart.com/ the most important aspects of M&A. Because the IRS cannot practically conduct an audit of all tax-paying company in the United States, mistakes or mistakes during the M&A process could lead to costly penalties. A well-planned preparation and detailed documentation will ensure that you don’t incur these penalties.

Tax due diligence typically involves the examination of tax returns and informational filings from both current and previous periods. The scope of the audit varies dependent on the nature of transaction. For example, entity acquisitions typically have greater risk than asset purchases due to the fact that taxable target entities may be susceptible to joint and several liability for the taxes of all the participating corporations. Furthermore, whether a taxable target is listed in consolidated federal income tax returns, and the sufficiency of documentation regarding transfer pricing related to intercompany transactions are additional factors that may be reviewed.

A review of tax years prior to the year can also reveal if the target company is in compliance with the regulations and also some red flags that may indicate tax fraud. These red flags could include, but aren’t only:

The final phase of tax due diligence is comprised of interviews with the top management. The aim of these interviews is to answer any questions the buyer may have and to provide clarity on any issues that might impact the deal. This is particularly important in acquisitions involving complex structures or unclear tax positions.