Tax due diligence (TDD) is one of the most overlooked – and yet one of the most important aspects of M&A. The IRS can’t audit every company in the United States. Therefore, mistakes and oversights made during the M&A procedures can result in heavy penalties. A well-planned and meticulously documented process can ensure that you don’t incur these penalties.

As a general rule tax due diligence is the review of previous tax returns as well as the review of current and historical informational filings. The scope of the review differs based on the type of transaction. For instance, acquisitions of entities, are more likely to expose the company’s assets than asset purchases since taxable target companies may be jointly and multiplely liable for the tax liabilities of participating corporations. Other factors include whether an entity that is tax-exempt is included in combined federal tax returns and the amount of documentation pertaining to transfer pricing for intercompany transactions.

Reviewing prior tax years will also reveal if the click for more info about Paperless board meetings guide target company complies with the applicable regulations and also several warning signs that may indicate tax abuse. These red flags include but aren’t the only ones:

The final stage of tax due diligence consists of interviews with top management. These meetings are designed to answer any queries the buyer might have and to discuss any issues that could impact the deal. This is particularly important in transactions that involve complex structures or uncertain tax positions.