Tax Due Diligence in M&A Transactions

Tax obligations for businesses are more than simply paying tax on income. In the case of M&A doing tax due diligence is an essential step in determining the responsibilities, liabilities and tax issues are present for the company you’re looking to acquire.

The scope of tax due diligence is dependent on the nature and size of the target company as well as the scope of the transaction, but it could include a thorough examination of foreign reporting forms (e.g., Form T106) and audits in the past, or objections as well as transfer pricing, GST/HST returns and related party transactions. It could also include the examination of local and state taxes (e.g. sales and use taxes property taxes and property laws that are not claimed, as well as misclassification of employees as independent contractors).

While it is easy to focus on the complex federal tax laws taxes, state and local taxes can be significant and have a significant effect on a company’s financial health. In addition, reputational damage typically occurs when a company is perceived as being VDRs: at the forefront of revolutionizing business intelligence tax avoiders, which isn’t easy to recover from.

In the majority of instances, when a tax return is prepared, it’s mandatory to sign by the preparer the return under penalty of perjury and affirm that the return is truthful and accurate to the best of their knowledge and conviction. However, a recent decision suggests that the IRS may go beyond this standard in reviewing whether the preparer was able to demonstrate reasonable diligence when preparing a return.