Tax due diligence (TDD) is one of the least considered – and yet crucial – elements of M&A. Because the IRS cannot practically conduct an audit of each company in the United States, mistakes or mistakes made during the M&A process could https://allywifismart.com/why-secure-dataroom-is-your-way-to-success/ lead to severe penalties. A well-planned and meticulously documented process will aid in avoiding these penalties.
In general, tax due diligence encompasses the examination of previously filed tax returns, as well as current and historical informational filings. The scope of the audit is dependent on the type of transaction. For instance, acquisitions of entities, are more likely to expose an organization than asset purchases, as taxable target companies may be jointly and jointly liable for the taxes of the participating corporations. Other factors include whether or not an entity that is tax-exempt has been included in the combined federal tax returns and the amount of documentation regarding the transfer pricing of intercompany transactions.
A review of tax years will also show whether the target company complies with any applicable regulatory requirements as well as several red flags that indicate possible tax abuse. These red flags can include, but aren’t restricted to:
The final phase of tax due diligence is comprised of a series of meetings with top management. The purpose of these meetings is to answer any questions buyers might have, and to provide a clear understanding of any outstanding issues that could impact the deal. This is especially important when buying companies with complicated structure or uncertain tax positions.