What Is Tax Due Diligence and How Can It Affect My Deal Value?

According to Deloitte, 49% of failed M&A transactions cite tax and financial mismanagement as a key cause. Whether you’re acquiring a business or selling one, tax due diligence isn’t just a checkbox—it’s a deal-shaping tool that can increase or reduce your final valuation by millions. Done right, it gives buyers confidence and protects sellers from last-minute surprises. Done poorly—or skipped entirely—and both sides risk costly consequences.

For businesses looking to avoid unnecessary risk, proper tax due diligence backed by a qualified business tax expert is non-negotiable.

What Is Tax Due Diligence?

Tax due diligence is the process of thoroughly analyzing a company’s tax records before a merger, acquisition, or investment.

It involves reviewing federal, state, and international filings to identify potential exposures, liabilities, and compliance gaps. Buyers typically lead this process, but sellers often conduct internal due diligence to preempt issues and justify their asking price.

Key focus areas in tax due diligence include:

Historical Tax Liabilities: Ensuring the company has no unpaid taxes or unresolved audits.
NOLs and Tax Credits: Confirming if and how Net Operating Losses and tax credits can carry forward post-transaction.
Transfer Pricing: Especially for international entities, checking compliance with cross-border transaction regulations.
Sales and Use Tax Compliance: Verifying multi-state obligations, especially post–Wayfair ruling.
Entity Structure: Understanding how the target is organized to assess pass-through implications, state nexus, and restructuring needs.

A reliable CPA help team can uncover exposures invisible to internal teams or general legal counsel.

Why Does Tax Due Diligence Matter in a Business Deal?

Tax risks directly impact deal structure, timing, and price.

Here’s how:

Deal Value Adjustments: If a buyer discovers unexpected tax liabilities during diligence, they may reduce their offer to offset potential risks.
Post-Closing Indemnities: Undisclosed issues can lead to post-deal claims, reducing the seller’s net gain.
Audit Triggers: Improper filings can signal red flags to tax authorities, prompting investigations.
Cash Flow Impact: Liabilities like back taxes or penalties can affect short-term liquidity forecasts post-acquisition.

Without comprehensive diligence, what looks like a profitable deal can quickly turn into a legal or financial burden. That’s where working with a business tax expert comes in.

How Does Tax Due Diligence Affect Buyers and Sellers Differently?

Buyers and sellers approach tax due diligence with different motivations—but both need it.

For Buyers:

Validate the target’s financial health.
Avoid inheriting tax liabilities.
Negotiate protections or escrows in case of future exposure.

For Sellers:

Identify and fix tax issues before they derail negotiations.
Justify the valuation and minimize price chipping.
Speed up closing by removing uncertainty.

Engaging a third-party CPA help provider allows both sides to make informed, defensible decisions—especially in high-stakes or cross-border deals.

What Are Common Red Flags Uncovered During Tax Due Diligence?

Even companies with clean books may have hidden risks. Here are a few common tax red flags:

Late or Missing Filings: Even minor omissions can delay deals.
Aggressive Deductions or Positions: May not hold up under audit.
Incorrect Entity Classification: Affects tax treatment post-transaction.
Unrecognized Nexus in Other States: Creates multi-state exposure.
Overlooked International Compliance: Particularly for transfer pricing and VAT.

Identifying these issues early gives deal teams time to resolve or negotiate around them—before they impact value.

How Can a Business Tax Expert or CPA Help Maximize Deal Value?

A business tax expert offers more than compliance—they offer strategy.

Here’s what experienced CPA support brings to the table:

Scenario Planning: Model tax impact across deal structures (asset vs. stock sale, etc.).
Risk Mitigation: Identify exposures early so they can be addressed before closing.
Documentation: Build audit-ready documentation that stands up to IRS or regulatory scrutiny.
Post-Deal Integration Advice: Ensure smooth tax transitions post-acquisition.

At GHLLP, our CPA help services are designed to deliver not just peace of mind—but stronger negotiating power and optimized deal outcomes.

FAQs About Tax Due Diligence in M&A

What’s the difference between tax due diligence and financial due diligence?

Tax due diligence focuses solely on tax compliance, exposures, and strategy, while financial diligence covers broader areas like revenue, cash flow, and profit validation.

When should tax due diligence begin?

Ideally, start during the initial LOI (Letter of Intent) phase to spot deal-breakers early.

Can a deal close without tax due diligence?

Yes, but it’s risky. You could inherit unpaid taxes, misclassifications, or penalties that reduce deal value.

Who typically performs tax due diligence?

Usually an external CPA firm or tax advisory firm with M&A experience.

Is tax due diligence needed for small business deals?

Absolutely. Even deals under $5M can involve complex tax implications—especially with multiple owners or locations.

Closing Thought
In every transaction, knowledge is leverage. Tax due diligence empowers you to negotiate smarter, close faster, and preserve deal value. Don’t approach a deal without a qualified business tax expert by your side.