Tax due diligence is an important aspect of M&A which is often neglected. The IRS cannot audit every business in the United States. Therefore, mistakes and oversights made during the M&A processes can lead to significant penalties. A well-planned and meticulously documented process charting the course of due diligence in fintech with VDRs will ensure that you don’t incur these penalties.
Tax due diligence typically involves the examination of tax returns and informational filings from both current and past periods. The scope of the review differs based on the type of transaction. For example, entity acquisitions typically have greater risk than asset acquisitions, due to that taxable target entities can be subject to joint and numerous tax liability of all corporations participating. Furthermore, whether a taxable target is listed in consolidated federal income tax returns, and the sufficiency of documentation regarding transfer pricing related to intercompany transactions are additional factors that can be scrutinized.
The review of prior tax years could help determine if the company is in compliance the regulations and also some red flags that indicate possible tax abuse. These red flags could include, but aren’t only:
Interviews with top management are the final step in tax due diligence. The goal of these interviews is to answer any questions the buyer might have, and to clarify any issues that might impact the deal. This is particularly crucial when dealing with acquisitions that have complex structures or uncertain tax positions.
