Tax due diligence is a review of a business’s operations and tax procedures prior to a merger and acquisition.  For a purchaser, the goal of tax due diligence is to uncover material tax exposures.  The materiality threshold can vary with the size of the deal or the business.  Nearly all tax due diligence uncovers some tax exposures.  The tax exposures can include sales tax, income tax, employment tax, property tax, and unclaimed property, as well as special industry taxes.  The discovered tax exposures are then recorded as either a one-time hit to EBITDA or an annual adjustment to EBITDA.  Once discovered, a purchaser can mitigate potential risks by pursuing voluntary disclosure agreements on certain material taxes, including an escrow or indemnification for the tax and costs of mitigating.  Meanwhile, a business can take a prospective approach for smaller liabilities but retain indemnification in case the issue is discovered.  The goal is to properly address the tax exposures during a merger and acquisition.  Most of the potential exposures will succeed in an asset acquisition, including sales and use tax, property tax, unclaimed property and many state employment tax exposures.  Additionally, certain states provide that state income tax liabilities can follow an asset acquisition.  Finally, the transfer taxes become more complicated with an asset deal.    

It should be noted that representations and warranties insurance could be obtained as part of the deal. Insurance underwriters may ask specific questions about the tax due diligence process to ensure that the report was conducted properly. 

We take a commercial approach. Yes, we will identify the potential exposures. A good tax advisor will explain the risk, the probability of being audited, the best ways to remediate the exposure for material states, the best way to handle escrows/indemnities, and how to approach negotiations.  At the end of the day, the goal is to get a deal done, but in a way that protects our client.