Tax Due Diligence Checklist: Complete M&A Tax DD Guide for 2025

Tax due diligence identifies liabilities averaging $500k-$5M+ in hidden exposure per transaction, with 65% of M&A deals revealing material tax issues, according to M&A tax research. Systematic tax DD prevents post-close surprises and informs purchase price adjustments.

Peony organizes tax DD: centralize tax documents in secure data rooms, track advisor review, maintain compliance documentation, and create audit trails. Purpose-built for M&A transactions.

Here's your complete tax due diligence checklist for 2025.

Tax DD Checklist Overview

Income Tax Review

Federal and state returns:

• Federal tax returns (3-5 years)
• State tax returns (all states, 3-5 years)
• Tax provision calculations (book-to-tax reconciliation)
• Effective tax rate analysis
• Deferred tax assets and liabilities

Tax basis and attributes:

• Tax basis in assets
• Inside vs. outside basis (partnerships)
• Net operating loss (NOL) carryforwards
• Tax credit carryforwards (R&D, foreign, etc.)
• Capital loss carryforwards

Tax positions:

• Uncertain tax positions (FIN 48/ASC 740)
• Reserve for tax contingencies
• Aggressive tax positions
• Transfer pricing positions
• Tax shelter participation

Tax accounting methods:

• Revenue recognition method
• Inventory accounting
• Depreciation methods
• Accrual vs. cash
• Section 263A compliance

Red flags:

• Declining effective tax rate (aggressive positions?)
• Large uncertain tax positions
• NOL limitation concerns (Section 382)
• State nexus exposure
• Pending tax audits

Sales & Use Tax

Sales tax compliance:

• Sales tax returns (all jurisdictions, 3 years)
• Sales tax nexus analysis
• Exemption certificates (resale, manufacturing, etc.)
• Taxability determinations
• Sales tax accruals

Use tax:

• Use tax compliance
• Vendor purchases analysis
• Use tax accrual adequacy
• Reverse audit risk

Economic nexus:

• State-by-state analysis (Wayfair implications)
• Registration status
• Compliance in marketplace states
• Potential exposure calculation

Red flags:

• No sales tax compliance (common for startups)
• Marketplace seller issues
• Economic nexus ignored
• Missing exemption certificates
• Use tax not accrued

Payroll Taxes

Payroll compliance:

• Payroll tax returns (federal and state, 3 years)
• Form 941 (quarterly federal)
• Form 940 (annual federal unemployment)
• State unemployment tax returns
• Workers' compensation compliance

Employee classification:

• W-2 employees vs. 1099 contractors
• Independent contractor analysis
• Misclassification risk assessment
• Exempt vs. non-exempt status
• State-specific rules compliance

Benefits and compensation:

• Health and welfare benefits
• Retirement plan compliance (401k)
• Stock option taxation
• Deferred compensation (409A)
• Fringe benefit taxation

Red flags:

• Misclassified contractors (huge risk)
• Unpaid payroll taxes
• Late filings and penalties
• 401(k) compliance issues
• Stock option problems

Property Taxes

Real property:

• Property tax returns
• Assessment notices
• Appeal history
• Exemption claims
• Tax abatements

Personal property:

• Personal property tax filings
• Asset listings
• Valuation support
• Exemption compliance

Red flags:

• Under-reported assets
• Missing filings
• Assessment challenges likely
• Exemptions at risk

International Taxes

Transfer pricing:

• Transfer pricing documentation
• Intercompany agreements
• Advance pricing agreements (APAs)
• Country-by-country reporting
• Transfer pricing studies

Foreign tax credits:

• Foreign tax credit calculations
• Foreign tax paid documentation
• Subpart F income
• GILTI calculations
• BEAT analysis

Tax treaties:

• Treaty benefit claims
• Permanent establishment analysis
• Withholding tax compliance
• Treaty shopping concerns

FATCA/CRS:

• FATCA compliance
• Common Reporting Standard
• Foreign account reporting

Red flags:

• Transfer pricing not documented
• Tax haven structures
• BEPS concerns
• Thin capitalization
• Missing tax treaty documentation

Tax Controversies

Audit status:

• Open tax audits (federal, state, local)
• Audit history (3-5 years)
• Issues under examination
• Proposed adjustments
• Settlement negotiations

Disputes and litigation:

• Tax court cases
• Appeals pending
• Administrative protests
• Settlement agreements

Prior settlements:

• Closing agreements
• Settlement terms
• Ongoing compliance requirements

Reserves:

• Tax reserve adequacy
• Uncertain positions
• Probability assessments
• Contingent liabilities

Red flags:

• Multiple open audits
• Repeat issues
• Large proposed adjustments
• Weak reserve documentation
• Litigation history

Tax DD Timeline

Week 1-2: Data gathering

• Request tax documents
• Access tax returns
• Interview tax personnel
• Review processes

Week 3-4: Analysis

• Compliance review
• Position evaluation
• Risk assessment
• Attribute verification

Week 5-6: Reporting

• Findings compilation
• Risk quantification
• Remediation recommendations
• Purchase price impact

Deliverable: Tax DD report with identified risks and estimated exposure

Tax DD Report Contents

Executive summary:

• Material findings
• Significant exposures
• Recommendations
• Impact on purchase price

Detailed findings:

• Compliance issues by category
• Tax position analysis
• Risk quantification
• Probability assessments

Tax attributes:

• NOL and credit verification
• Limitation analysis (Section 382)
• Utilization projections
• Value assessment

Recommendations:

• Structure optimization
• Indemnification requirements
• Escrow hold-backs
• Post-closing actions

Using Peony for Tax DD

Peony organizes tax due diligence:

Document collection:

• Request all tax documents
• Create organized structure
• Track submission
• Version control

Team collaboration:

• Tax advisor access
• Internal team review
• Q&A management
• Finding documentation

Audit trail:

• Document all access
• Track review progress
• Maintain records
• Compliance support

Result: Efficient, documented tax DD process.

Conclusion

Tax due diligence identifies compliance issues, quantifies exposures, verifies tax attributes, and informs transaction structure across income, sales, payroll, property, and international taxes. While hidden tax liabilities average $500k-$5M+ per deal, systematic DD prevents post-close surprises.

Peony enables organized tax DD by centralizing documents, tracking advisor review, and maintaining complete audit trails—supporting thorough tax evaluation.

Organize tax due diligence: Try Peony

Related Resources

• M&A Due Diligence
• Financial DD Checklist
• Data Room Organization
• M&A Process Guide