Tax due diligence is an the profound impact of VDRs on today’s corporate strategies important aspect of M&A that is often left unnoticed. Because the IRS cannot practically conduct a tax audit of every company in the United States, mistakes or mistakes during the M&A process can result in onerous penalties. A thorough and well-organized process will help you avoid these penalties.

Tax due diligence generally refers to the review of previous tax returns as well as documents pertaining to information from current and past periods. The scope of the audit varies dependent on the nature of transaction. For instance, entity acquisitions typically involve greater potential exposure than asset purchases, due to the fact that taxable target entities may be subject to joint and multiple obligation for taxes of all participating corporations. Also, whether a tax-exempt target has been listed on the consolidated federal income tax returns and whether there is sufficient the documentation on transfer pricing for intercompany transactions, are additional aspects that could be examined.

A review of tax years will also reveal if the target company complies with applicable regulatory requirements as well as several red flags that indicate possible tax evasion. These red flags may include, but are not limited to:

The final phase of tax due diligence is comprised of interviews with senior management. These meetings are designed to answer any queries the buyer might have and to discuss any issues that could have an impact on the deal. This is especially crucial in acquisitions involving complicated structures or uncertain tax positions.