In the weeks leading up to a sale, finance teams should begin a focused tax health check that maps every tax position to the underlying substantiation. Start by compiling a ledger of current year risks, including uncertain positions and potential penalties, then trace each item to the precise source documents if they exist. Gather all tax credits claimed, the eligibility criteria, and supporting calculations that prove they were properly earned. Finally, assemble a narrative describing the company’s tax posture, the governance processes that reviewed it, and any remediation steps already taken. This proactive approach reduces last‑minute surprises and builds buyer confidence in the company’s tax story.
To create a robust evidence pack for due diligence, assemble copies of key filings across jurisdictions, with clear cross‑references to relevant schedules. Include copies of returns, notices, and correspondence with tax authorities, and document any open issues or audits. Where positions have evolved, provide a chronological record showing how and why changes occurred, along with the decision rationales. Ensure that all credits are supported by statutory citations, eligibility requirements, and calculation methodologies. A well‑organized dossier demonstrates control discipline, minimizes back‑and‑forth during diligence, and signals a mature tax function capable of sustaining compliance after the transition.
A clear tax‑due diligence pack reinforces credibility and smooths negotiations.
The heart of a thorough tax due diligence package is transparency about how tax positions were determined. For each material position, describe the legal basis, the facts, and the assumptions adopted at the time of filing. Include the exact forms and schedules where the position appears, along with any internal approvals that validated the entry. If positions were defended in prior audits or litigations, summarize outcomes, authorities’ considerations, and lessons learned. Also provide a concise risk assessment for each item, highlighting potential exposure and the steps taken to monitor developments. A transparent narrative helps buyers understand not just what was filed, but why it was prudent given the circumstances.
Documentation of historic filing practices should cover governance, controls, and cadence. Outline who held responsibility for tax decisions, how approvals flowed through finance leadership, and what checks existed to catch errors before submission. Include access logs, version histories of returns, and audit trails for important tax elections. If third‑party advisers contributed to filings, identify roles, fees, and any qualifications they held. An accompanying memo can explain why certain elections were chosen, how risk tolerance shaped those choices, and how processes have evolved to reflect changes in law, business structure, or operations.
Methodical organization of historic filings signals disciplined compliance culture.
Credits can be a focal area in diligence, but only when their eligibility and math are impeccably documented. List each credit claimed, the jurisdiction, and the period of eligibility. Attach the supporting studies, receipts, and computations that verify the claim. If a credit is subject to sunset clauses or cap limitations, specify timing and the expected impact on post‑sale results. Explain any interactions with other credits or with general business losses to prevent double counting. A buyer will scrutinize the continuity of credit eligibility after the sale, so emphasize the processes that preserve entitlement under new ownership.
In addition to credits, provide an inventory of all tax attributes that could transfer or survive under ownership changes. This includes net operating losses, basis adjustments, and capitalized costs that may influence future deductions. For each attribute, include the exact carryforward amounts, expiration dates, and the jurisdictions where they apply. Describe any limitations or modifications that could affect utilization in the coming years. If any attributes were previously unused or partially utilized, explain the rationale, the recovery strategy, and any potential tax planning opportunities the buyer might pursue.
Build a centralized, auditable trail of tax governance and decisions.
When documenting historic filings, a chronological timeline helps readers trace the company’s tax evolution. Create a year‑by‑year arc that highlights changes in entity structure, tax elections, and address changes that could impact nexus. Note material one‑offs, such as windfall disclosures or settlement agreements, and explain their impact on the overall tax posture. Include any reorganizations that altered tax attributes or allowed new deductions. The aim is to present a clean, cohesive history that connects strategic business decisions to their tax consequences, so buyers see a coherent story rather than a patchwork of filings.
A practical appendix should accompany the narrative, with ready‑to‑use references for diligence teams. Include a master index of documents, with brief annotations to speed review. Provide a digital repository link or a secured file transfer routine to access the materials, ensuring confidentiality and version control. Where possible, offer redacted copies of sensitive items accompanied by executive summaries that convey essential insights without compromising defensibility. The appendix should be navigable for both tax specialists and non‑tax executives, enabling swift comprehension of complex positions and their implications for the deal terms.
A comprehensive, credible tax dossier accelerates a smoother exit.
Governance is not just about approvals; it’s about traceability. Capture who approved each tax filing item, the date of approval, and the rationale documented in the file. Reflect who reviewed the file for consistency with corporate policy, whether indirect tax, transfer pricing, or international considerations were involved, and how conflicts were resolved. Document any deviations from standard process, the reasons for those deviations, and measures taken to mitigate risk. A well‑maintained governance record reassures buyers that tax decisions were deliberate, repeatable, and aligned with the company’s risk appetite.
Finally, address potential buyer concerns proactively by outlining remediation actions already completed or planned. If any positions were challenged or adjusted in response to evolving interpretations, describe the corrective steps and the resulting improvements in accuracy. Provide a summary of testing performed to validate filings, including reconciliations between books and tax returns, and any external audits or peer reviews conducted. A proactive posture signals readiness to engage in a smooth post‑deal transition and reduces negotiation friction around tax issues.
Beyond the hard documents, consider the strategic framing of the tax story you present to buyers. Develop talking points that connect tax outcomes to business performance, such as how credits supported cash flow or how risk controls protected the bottom line. Prepare clear explanations for any unusual items, including the rationale behind aggressive positions or conservative stances. Offer scenarios illustrating how tax attributes could evolve after the closing and how the buyer might optimize value post‑transaction. A well‑crafted narrative complements the stacks of documents and helps negotiators see the full value of a well‑managed tax function.
In closing, invest in a robust, scalable process for ongoing tax diligence after the deal closes. Establish a transition plan that assigns responsibility for tax governance, ensures access to historical documentation for post‑acquisition audits, and defines cadence for updates on evolving tax laws. Provide training for new owners’ finance teams on the found data and the rationale behind key decisions. Finally, document a clear path for addressing new jurisdictions, changing credits, or revised election strategies, so the buyer understands how the company will stay compliant and financially efficient under new ownership. A durable process preserves value far beyond the deal date.
