Tax obligations for businesses are more than paying income tax. Tax due diligence is a vital step in M&A. It helps determine what liabilities, responsibilities and tax issues a target company is facing.
The scope of tax due diligence differs according to the type and size the company ensuring data integrity in M&As with top-tier VDR solutions being targeted and also the scope of the transaction, but it could include an examination of foreign reports (e.g. Form T106) as well as past audits or objections and transfer pricing, GST/HST returns and related party transactions. It can also include an investigation 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 contractor).
Although it’s easy to focus on the complexities of Federal tax laws, there are state and local taxes that can be substantial and have an impact on a company’s financial health. A company’s reputation may be damaged if it is thought to be a tax cheat. This is an extremely difficult thing to come back from.
In most situations, when a return is prepared, it’s required that the preparer sign the return under penalty of perjury and affirm that the return is truthful and accurate to the best of their knowledge and conviction. A recent ruling suggests the IRS may go above the standard of determining if the preparer has taken reasonable care when making a tax return.