Tax Due Diligence in M&A Transactions

Tax obligations for businesses are more than just paying tax on income. When it comes to M&A doing tax due diligence is an important step in determining the responsibilities and liabilities exist for a target company.

The scope of tax due diligence varies dependent on the type and size the company that is being targeted and the nature of the transaction, but it could include an examination of foreign reporting forms (e.g., Form T106) as well as past audits or objections of transfer pricing, GST/HST returns and related party transactions. It can also include an examination of local and state tax laws (e.g. sales and use taxes as well as property taxes; unclaimed property statutes and misclassifications of employees as independent contractors).

While it is easy to focus on the intricate federal tax laws, state and local taxes can be significant and have a significant effect on a company’s financial health. Additionally, reputational damage usually happens when a business is perceived as being tax evaders, and this isn’t easy to recover from.

In the majority of instances, when a tax return is completed, it is required that the preparer sign the return under penalty of perjury and affirm that the return is true and accurate to the best of their knowledge and conviction. A recent ruling suggests the IRS could go beyond this standard when determining whether the tax preparer took reasonable care in preparing a tax return.

charting the course of due diligence in fintech with VDRs

Syed Reyhan

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