What Is a Tax Due Diligence

The regulation also uses the term “diligence” and generally describes due diligence as synonymous with the notion of acting with reasonable care and good faith. While the regulation doesn`t include comprehensive guidelines on what constitutes due diligence when creating a return, it does address the issue in general and also includes some details related to trusting customer information, the work of other creators, and feedback from the previous year. With this in mind, the effort expected to meet the standard of due diligence can be extrapolated to other common situations. Tax due diligence is a comprehensive examination of the different types of taxes that may be imposed on a particular company, as well as the different tax jurisdictions in which it may have a sufficient connection to be subject to such taxes. The purpose of tax due diligence, which is most often used on the purchase side of a transaction, is to uncover significant potential tax risks. Unlike preparing the annual tax return, tax due diligence focuses less on missed items or relatively small miscalculations (e.g., B if an ineligible deduction for meals and entertainment was $10,000 instead of $5,000). While the materiality threshold may change with the value of the business (or the target if the transaction involves less than 100% of equity), an amount that would affect a buyer`s negotiations or decision to proceed with a transaction is generally higher than that that which would affect a tax preparer. Financial due diligence is usually the most studied aspect of the due diligence process, but don`t let familiarity obscure the task at hand. A thoughtful and holistic approach is needed to truly understand potential risk areas and their corresponding impact on the transaction. We create unique tax structuring opportunities that are not typically known or used by other providers, resulting in significant savings for our clients.

In addition, we have flexible fee arrangements that help create value for clients. We create comprehensive and easy-to-understand tax models that enable efficient negotiation of tax structuring positions. Our fully integrated tax team works closely with other due diligence streams and service providers (p.B. Legal, Finance, IT, etc.) to maximize results for our customers. Key tax due diligence services: By conducting tax due diligence as part of the purchase valuation process, a buyer can be confident that they are making a decision based on all the facts, including their potential tax risks. This knowledge can help increase a buyer`s ability to achieve the desired results of the sale. Conducting tax due diligence on the seller`s side is just one of the many considerations you should consider when deciding to sell your business. Read our article “Top Reasons to Sell Your Business and When You Should Sell” for a detailed discussion of the factors that can influence this decision. Based on the most important information obtained through tax due diligence, a buyer: At BDO, we understand and have extensive experience working with buyers in the area of tax due diligence. For more information or to learn more about the potential tax implications of other business transactions, please contact our transaction tax team or your local BDO office. After providing due diligence software for hundreds of transactions, DealRoom has been able to set up a tax due diligence model that addresses any tax issues you are likely to encounter in your M&A process that you can access here. Buyers primarily invest in tax due diligence to obtain an independent review of a target company`s tax profile to identify potentially significant tax risks prior to a purchase.

Tax due diligence can be crucial for buyers considering a stock or asset transaction. For buyers considering buying assets, tax due diligence may be less of a concern depending on the transaction. Indeed, as long as the buyer and seller are independent parties acting on market conditions and the assets are acquired at fair value, there should be no significant risk of historical tax liability for the buyer. The tax audit includes not only income taxes, but also sales and use taxes, payroll and employment taxes, property taxes, unclaimed and abandoned property (escheatment), and the classification of independent contractors and employees. If the target companies have foreign subsidiaries or foreign parent companies, tax due diligence may include a review of transfer pricing and foreign tax credits. The process includes reading tax returns (for all types of taxes) and non-tax documents, as well as inquiries to the target company`s management and tax advisors. Reading non-tax documents such as minutes of LLC`s board meetings or general meetings, related financial statements and footnotes, stock compensation plans, and employment contracts can lead to the discovery of a variety of potential tax issues, including previous ownership changes that affect a company`s ability to use net business interruption carry-forwards. on future income, aggressive or uncertain tax positions. and deferred compensation and golden parachute problems. The need for tax due diligence is sometimes overlooked by buyers who focus on the quality of profit analysis or other forms of non-financial due diligence, but has never been greater than it is today. The increasing complexity of federal, state, and local tax laws, the myriad of taxes imposed on businesses, the aggressive (and sometimes avoidable) tax reduction or deferral strategies used by taxpayers, vigorous enforcement by tax authorities, and the expansion of the foundations of state tax exus by state legislators all help ensure that an investment made without an appropriate investment Tax review is conducted, is in danger. Example 3: G asks H to prepare an organizer to help prepare his Form 1040 for 2009.

H, who is travelling as part of his Schedule C business, indicates in the organizer the amount he will incur for accommodation and other travel expenses while away from home. The Organizer also summarizes the requirement of Section 274(d) and the documentation requirements it contains, such as receipts in support of such deductions, and requires the Customer to check a box to indicate that it has met this requirement. H selects this check box. Unless G has reason to believe that H`s travel expense amount is incorrect or that her response to the documentation is incorrect, she must exercise due diligence in calculating a travel expense deduction based on the information provided. Example 7: L was tasked with preparing Form 1120 2009, U.S. Corporate Income Tax Return, for M Corp. He is told that M&O, a respected CPA firm in his community, hired to conduct a tax analysis of M`s research activities for 2009, and that as part of this mission, N&O created a Form 6765, Credit for Increased Research Activities, to be used in the context of the client`s 2009 return. Assuming that none of the exceptions to the general rule are applicable (the form is not inappropriate at first glance, etc.), L can prepare the return of M with reasonable care using Form 6765 without further verification. In particular, unless one of the exceptions set out in the Regulations is affected, L may prepare the return using Form 6765 without reviewing the N&O working papers or M business documents that N&O may have reviewed during its order. DealRoom has developed its tax due diligence component with this in mind: as mentioned above, the concept of due diligence is implicit when a creator tries to qualify for the exemption from the penalty that applies when the creator proves that the euphemism is due to a reasonable reason and the creator acted in good faith….