Everyone knows they must pay income tax, but there’s so much more that goes into the tax obligations of a business. In the case of M&A, conducting tax due diligence is an essential step example of tax preparation due diligence in determining the responsibilities and tax obligations exist for the target company.
The scope of tax due diligence is depending on the nature and size of the target company as well as the scope of the transaction, but it may include an examination of foreign reports (e.g., Form T106) as well as audits that have been conducted in the past or objections, transfer pricing, GST/HST returns and related party transactions. It may also include an examination of local and state taxes (e.g., sales and use taxes, property taxes and unclaimed property statutes, as well as the incorrect classification of employees as independent contractors).
While it is easy to focus on the complexities of federal tax laws, state and local taxes can be significant and have an impact on the financial health of a business. The reputation of a company can be damaged if it is believed to be a tax-evader. This can be very difficult to overcome.
In most situations, when a return is prepared, it’s mandatory that the person who prepared the return sign the return under the penalty of perjury, and declare that the return is truthful and accurate to the best of their knowledge and belief. However, a recent ruling suggests that the IRS may go beyond this standard when determining whether the preparer was able to demonstrate reasonable diligence when preparing a tax return.
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