Tax due diligence is an essential aspect of M&A which is often neglected. The IRS can’t audit every company in the United States. Therefore, errors and oversights made during the M&A processes could result in massive penalties. A thorough and well-organized process will aid in avoiding these penalties.
As a general rule tax due diligence is the review of previously filed tax returns as well, as well as current and historical informational filings. The scope of the review differs based on the type of transaction. Entity acquisitions, for example are more likely to expose the company to liability than asset purchases, as target companies that are tax deductible may be jointly and jointly liable for the taxes of participating corporations. Additional factors the intersection of AI and VDRs in enhancing due diligence include whether an entity that is tax-exempt has been included on the Federal tax returns consolidated and the amount of documentation that is related to the transfer pricing of intercompany transactions.
Reviewing tax returns from prior years will also reveal whether the target company complies with the applicable regulations as well as a number of red flags indicating possible tax abuse. These red flags include but aren’t restricted to:
Interviews with the top management are the final step in tax due diligence. These interviews are designed to answer any queries the buyer might have, and to discuss any issues that could affect the transaction. This is especially crucial when acquiring companies with complex structures or tax positions that are unclear.