Tax Due Diligence in M&A Transactions

Every business owner is aware that they must pay income tax however there’s a lot more to be concerned with a company’s tax obligations. When it comes to M&A conducting tax due diligence is an essential process to determine what responsibilities and tax obligations exist for the target company.

Tax due diligence may differ depending on the size and type of the target company as well as the nature and scope of the transaction. It could include an examination of reports from foreign reporting agencies, past audits or objections, and related party transactions. It may also involve an investigation of local and state tax laws (e.g. sales and use tax and property taxes; statutes of unclaimed property; and misclassifications of employees as independent contractor).

While it’s easy for people to focus on the complexities of Federal tax law, there are a variety of state and local taxes that can be significant and have an impact on the financial health of a business. A company’s reputation can also be damaged if believed to be a tax-evader. This is an extremely difficult thing to overcome.

In the majority of situations, when a return is completed, it is required to sign by the preparer the return under penalty of perjury, stating that the return is truthful and accurate to the best of their knowledge and conviction. However, a recent ruling suggests that the IRS may go beyond this standard in reviewing whether the tax preparer has exercised reasonable diligence while preparing a return.