This template is sponsored by 

Tax Due Diligence Checklist

The Aim of A Tax Due Diligence Template

This checklist offers you a comprehensive examination of different types of taxes that could be set upon a certain business, as well as tax jurisdictions and other crucial taxing items a company should know about. Specifically, completing tax due diligence is important because of it:

  • Helps you identify tax-related risk before acquiring a company; identifying risky tax items may have a significant impact on the target company’s value
  • Provides you with an analysis of the target’s tax treatment
  • Leverages a clear image of the company’s tax consistency with the state tax regulations
  • Yields an analysis of the target’s tax settlements and social security contributions - again, in order to identify tax risks

Requesting Taxation Information from the Selling Side

This should be on your top-priority list when engaging the purchase of the desired business as this information can give you a complete insight into the company's work and regulations.

  • Request the last five fiscal years of tax data:
  • Federal tax returns
  • State tax returns
  • Local tax returns
  • Income and sales tax returns data
  • Request company settlement documents from the taxing institution
  • Request for access to net operating losses as well as the credit carryforwards

Gain Access to Copies of Tax Correspondences

  • Obtain copies of files such as correspondence with tax authorities
  • Obtain copies of the correspondence or notices from:
  • Foreign taxing authority
  • Federal taxing authority
  • State taxing authority
  • Local taxing authority
  • Request “failure to file” notices as well
  • Request, and be on the lookout for, out of the ordinary tax correspondence with tax agencies

General

Always ask for audit information conducted on the target company since it may provide you with sufficient taxing information. Namely, you should request:

  • All available audit information
  • Information related to any return or report filed by the company for the last five fiscal years
  • Information related to any pending audits or administrative disputes related to taxes for open periods
  • Tax agreements and data crucial for tax reports
  • Allocation agreements
  • Sharing agreements
  • Preparation agreements which involve the company
  • Agreements which extend the period for assessment or collection for all types of taxes

Federal Taxing Information

  • Consider if the purchase of this company would change the entity type
  • Thoroughly check if the prior transactions of the target company were executed properly
  • Determine if all returns have been filed on time and, if not, if extensions have been requested on time
  • Based on the statute of limitations, determine open tax years
  • See for yourself which exact methods this company was using for accounting
  • Request to view the IRS acknowledgment letter
  • Examine tax credits and other carryforwards
  • Collect all relevant federal tax documents, such as IRS examinations and audits, audits in progress, notices, and other correspondences

State and Local Taxing Information

  • Check which tax returns and forms need to be used in each state the target company does business
  • Get a list of products and services sold in each state
  • Find out if the activities performed in the state rise above the minimum requirements
  • Examine state income tax filings and withholding
  • Consider state sales and use tax and review for all open years
  • Examine business property tax items for at least the last 3 years
  • Review tax payments to be sure that they are being paid timely
  • Review property tax statements for the last three years
  • Consider unclaimed property tax filings and get a copy of the files for the last few years

Compensation Taxes Information

  • Obtain a full review for payroll tax filings, payments, and withholding
  • Check with the federal payroll register for proper calculation of payroll
  • Inquire about payroll tax liabilities as well as the ones that remain unpaid after 30 days
  • Determine which types of retirement and benefit plans are offered by the company, as well as discrimination testing and results of compliance
  • Examine stock option plans

Possible International Taxing Information

  • Check if there is a permanent establishment in foreign jurisdictions for this company
  • If there is a permanent establishment in foreign jurisdictions, check to see if all the returns are paid on time and in compliance with the regulations in a foreign jurisdiction
  • Consider foreign tax withholding and transfer of pricing
  • Collect data about recent returns and audits in progress, as well as correspondences from foreign tax jurisdictions

Conclusion

  • Have your tax due diligence report fully prepared to wrap-up the negotiations
  • Indicate how tax due diligence is not an audit
  • Prepare a list of documents which you have reviewed, employees you have interviewed, and data about items which you could not make a conclusion about
  • For a fresh start, determine how working capital or purchase price will be calculated from now on
  • Decide who will be responsible for possible carryforwards or carrybacks for tax refunds
  • Determine custodian of records; this will make it easier for the new owner to keep the files
  • Prepare a cost analysis to determine how to reduce the transaction costs
  • See exactly which tax payments, withholdings, and returns are due after closing and determine the responsible personnel
  • Decide which way your newly purchased business taxes will be regulated and how you will keep data and files safe and updated

private equity icon

Tax Due Diligence Checklist

The Aim of A Tax Due Diligence Template

This checklist offers you a comprehensive examination of different types of taxes that could be set upon a certain business, as well as tax jurisdictions and other crucial taxing items a company should know about. Specifically, completing tax due diligence is important because of it:

  • Helps you identify tax-related risk before acquiring a company; identifying risky tax items may have a significant impact on the target company’s value
  • Provides you with an analysis of the target’s tax treatment
  • Leverages a clear image of the company’s tax consistency with the state tax regulations
  • Yields an analysis of the target’s tax settlements and social security contributions - again, in order to identify tax risks

Requesting Taxation Information from the Selling Side

This should be on your top-priority list when engaging the purchase of the desired business as this information can give you a complete insight into the company's work and regulations.

  • Request the last five fiscal years of tax data:
  • Federal tax returns
  • State tax returns
  • Local tax returns
  • Income and sales tax returns data
  • Request company settlement documents from the taxing institution
  • Request for access to net operating losses as well as the credit carryforwards

Gain Access to Copies of Tax Correspondences

  • Obtain copies of files such as correspondence with tax authorities
  • Obtain copies of the correspondence or notices from:
  • Foreign taxing authority
  • Federal taxing authority
  • State taxing authority
  • Local taxing authority
  • Request “failure to file” notices as well
  • Request, and be on the lookout for, out of the ordinary tax correspondence with tax agencies

General

Always ask for audit information conducted on the target company since it may provide you with sufficient taxing information. Namely, you should request:

  • All available audit information
  • Information related to any return or report filed by the company for the last five fiscal years
  • Information related to any pending audits or administrative disputes related to taxes for open periods
  • Tax agreements and data crucial for tax reports
  • Allocation agreements
  • Sharing agreements
  • Preparation agreements which involve the company
  • Agreements which extend the period for assessment or collection for all types of taxes

Federal Taxing Information

  • Consider if the purchase of this company would change the entity type
  • Thoroughly check if the prior transactions of the target company were executed properly
  • Determine if all returns have been filed on time and, if not, if extensions have been requested on time
  • Based on the statute of limitations, determine open tax years
  • See for yourself which exact methods this company was using for accounting
  • Request to view the IRS acknowledgment letter
  • Examine tax credits and other carryforwards
  • Collect all relevant federal tax documents, such as IRS examinations and audits, audits in progress, notices, and other correspondences

State and Local Taxing Information

  • Check which tax returns and forms need to be used in each state the target company does business
  • Get a list of products and services sold in each state
  • Find out if the activities performed in the state rise above the minimum requirements
  • Examine state income tax filings and withholding
  • Consider state sales and use tax and review for all open years
  • Examine business property tax items for at least the last 3 years
  • Review tax payments to be sure that they are being paid timely
  • Review property tax statements for the last three years
  • Consider unclaimed property tax filings and get a copy of the files for the last few years

Compensation Taxes Information

  • Obtain a full review for payroll tax filings, payments, and withholding
  • Check with the federal payroll register for proper calculation of payroll
  • Inquire about payroll tax liabilities as well as the ones that remain unpaid after 30 days
  • Determine which types of retirement and benefit plans are offered by the company, as well as discrimination testing and results of compliance
  • Examine stock option plans

Possible International Taxing Information

  • Check if there is a permanent establishment in foreign jurisdictions for this company
  • If there is a permanent establishment in foreign jurisdictions, check to see if all the returns are paid on time and in compliance with the regulations in a foreign jurisdiction
  • Consider foreign tax withholding and transfer of pricing
  • Collect data about recent returns and audits in progress, as well as correspondences from foreign tax jurisdictions

Conclusion

  • Have your tax due diligence report fully prepared to wrap-up the negotiations
  • Indicate how tax due diligence is not an audit
  • Prepare a list of documents which you have reviewed, employees you have interviewed, and data about items which you could not make a conclusion about
  • For a fresh start, determine how working capital or purchase price will be calculated from now on
  • Decide who will be responsible for possible carryforwards or carrybacks for tax refunds
  • Determine custodian of records; this will make it easier for the new owner to keep the files
  • Prepare a cost analysis to determine how to reduce the transaction costs
  • See exactly which tax payments, withholdings, and returns are due after closing and determine the responsible personnel
  • Decide which way your newly purchased business taxes will be regulated and how you will keep data and files safe and updated

FAQ

Can I change requests in this checklist or add new?

Every M&A and due diligence process is different. Downloaders are urged to make these checklists their own by changing the providing information to better fit their needs.

Does this questionnaire provide all the necessary due diligence information?

This due diligence questionnaire was created by and for M&A professionals and includes a comprehensive starting point for any diligence process. Every deal is different, however, and may require additional requests or diligence areas.

Easily Collect Data Using this Template in DealRoom

This Tax due diligence template can be easily downloaded and utilized as just the Excel sheet. However, it is most effective when paired with DealRoom’s dynamic due diligence software. We offer a secure space to conveniently request, collect, and house data. Additionally, DealRoom offers analytics, security features, and customized help to streamline the process. We are confident that with DealRoom you can close deals up to 40% faster.

How to use the template with DealRoom:
  • Download the due diligence template from DealRoom’s website
  • Open a room within DealRoom
  • Go to the Requests tab and select “import”
  • Import the downloaded template

The Requests tab is automatically populated with the requests from the due diligence template. Users can begin assigning, adding to, and completing due diligence requests.

Use DealRoom’s Premade Templates

Quick, easy download
Import into the room in a less than minute
Immediately begin requesting due diligence documents
or
M&A Science