Tax due diligence (TDD) is among the least https://allywifismart.com/data-room-and-its-support-for-modern-businesses/ thought of – and yet one of the most important aspects of M&A. Because the IRS is unable to conduct an audit of all tax-paying company in the United States, mistakes or oversights in the M&A process could result in onerous penalties. A thorough and well-organized process can aid in avoiding these penalties.

In general 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 an organization than asset purchases, as targets that are tax-exempt may be jointly and severally responsible for the tax liabilities of the participating corporations. Furthermore, whether a taxable target has been listed on consolidated federal income tax returns, and the sufficiency of transfer pricing documentation related to transactions between companies are other factors that may be reviewed.

Reviewing prior tax years will also show whether the business in question is in compliance with the applicable regulations as well as a number of red flags indicating possible tax evasion. These red flags can include, but aren’t restricted to:

Interviews with top management are the final step in tax due diligence. These meetings are designed to answer any queries the buyer might have and discuss any issues that could affect the purchase. This is especially important when purchasing companies with complex structures or unclear tax positions.