Tax Due Diligence in M&A Transactions
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Every business owner knows they have to pay income tax but there’s so much more to consider when it comes to the tax obligations of a company. In the case of M&A, conducting tax due diligence is an essential step in determining what responsibilities and tax obligations are present for the company you’re looking to acquire.
Tax due diligence may differ depending on the size and type of the company that is being targeted as well as the nature and scope of the transaction. It may involve an examination of the foreign reporting forms, previous audits or objections, and related party transactions. It could also include an review of state and local tax laws (e.g. sales and use taxes, as well as property taxes; statutes of unclaimed property and misclassification of employees as independent contractors).
While it’s easy to focus on the complexity of Federal tax law, there are state and local taxes that can be hefty and have an impact on a company’s financial wellbeing. In addition, reputational damage typically occurs when a company is seen as tax evaders, which is difficult to recover from.
In a typical situation when a tax return is being prepared, the preparer must sign the return under penalties of perjury and declare that it is to the best of his or their knowledge and belief and correct. A recent ruling suggests the IRS may go above the standard of determining if a preparer has exercised reasonable care in the preparation of a tax return.