Tax due diligence (TDD) is one of the most overlooked – and yet most critical – aspects of M&A. The IRS isn’t able to audit every single company in the United States. Therefore, mistakes and oversights that occur during the M&A processes could result in heavy penalties. A well-planned preparation and detailed documentation can ensure that you don’t incur these penalties.

As a general rule, tax due diligence encompasses the examination of previously filed tax returns as well as the review of current and historical informational filings. The scope of the audit varies according to the type of transaction. For instance, acquisitions of entities are more likely to expose an organization than asset purchases because target companies that are tax deductible may be jointly and jointly liable for the taxes of the participating corporations. Also, whether a tax-exempt target is included in the federal income tax returns that are consolidated, and the sufficiency of transfer pricing documentation related to transactions between companies are other factors to be considered.

The review of prior tax years could reveal whether the company is in compliance with regulatory requirements, as well as some red flags that could indicate tax evasion. These red flags may include, but need not be limited to:

Interviews with the top management are the final step in tax due diligence. The goal of these interviews is to answer any questions that the buyer might have, and to clarify any issues that are not resolved that could affect the purchase. This is especially important when purchasing data room analytics: transforming the landscape of M&A deals companies with complex structures or uncertain tax positions.