Tax Due Diligence: Timeline, Components & Checklist

Tax due diligence refers to the in-depth analysis of a company’s tax position prior to an extraordinary transaction, such as a merger or acquisition. It is essential for assessing the financial soundness of the target company and verifying that its tax position is compliant with relevant regulations.

This article explains all the factors involved in the tax due diligence checklist in order to better understand the documents required, the components, and the timing for carrying it out rigorously.

What Is Tax Due Diligence?

Tax due diligence is a fundamental step in any business transaction. It is essentially an in-depth analysis of the target company’s overall fiscal position conducted prior to an M&A or major investment.

Its purpose is to examine the company’s tax situation, verify its compliance with regulations, and that it has no latent liabilities, ongoing tax disputes, or future additional charges. This process allows you to establish a real and true value of the business in view of an acquisition or merger.

While financial due diligence analyzes the entire financial status of the company (balance sheets, profits, debts, cash flows, etc.), tax due diligence focuses exclusively on taxation. This makes it possible to verify that the firm is up to date with its payments, thus avoiding future risks and penalties.

When Is Tax Due Diligence Required?

Companies conduct tax due diligence whenever they engage in a significant corporate transaction, as it helps them assess the tax risks associated. The most common transactions are therefore mergers and acquisitions—to minimize the risk of future penalties, check the target company’s tax position, and identify a correct valuation—or corporate restructurings and joint ventures.

The scope of the analysis can vary considerably depending on factors such as business size, jurisdiction, and type of transaction.

Finally, sellers themselves may also carry out reverse due diligence to verify internally that everything is in order, making the company more attractive on the market.

Objectives of Tax Due Diligence

Tax due diligence aims to identify any tax risks that could compromise corporate success. It is not just a matter of verifying that tax payment but also of assessing the overall fiscal position of the target business to determine whether there are any latent liabilities, irregularities, or potential exposures.

Typically, professionals look for outstanding debts, ongoing litigation, tax issues relating to transfer pricing, any hidden liabilities, or irregular tax returns.

It is clear that the audit outcomes will then have a significant impact on both the valuation of the target company and the negotiation.

Key Areas of Review

To truly understand a company’s fiscal health, it is not enough to look at the financial statements: it is necessary to go into detail and analyze the key areas that often hide critical issues. Tax due diligence focuses precisely on these aspects, addressing technical elements that can have a concrete impact on negotiations.

The main areas of analysis are:

• Current and deferred income taxes
• VAT, sales taxes, and customs duties
• Social security contributions and employment taxes
• Transfer pricing tax and related documentation
• Tax losses carried forward, and tax credits
• Litigation, inspections, or ongoing investigations

Each of these areas can reveal latent risks or opportunities that need to be explored. That is why a thorough, well-structured, and tax preparer due diligence-led review is an essential step before any decision.

The Tax Due Diligence Process Timeline

Every tax review has a story to tell — but understanding it requires a structured, thoughtful process. It usually starts even before opening the files: aligning on what needs to be assessed and gathering the core documentation. 

From there, the first pass provides a broad overview, examining past filings, audit history, and any potential red flags. The deeper dive follows, focusing on liabilities, exemptions, and structural complexities that might raise concerns. Finally comes the report — and this isn’t just a checklist. It should tell a story, highlight risks, and provide clear, reasoned recommendations.

As for timing, it varies. A straightforward deal might require just a few days. Larger, cross-border transactions in multiple jurisdictions tend to stretch longer. What matters most is having the proper scope from the outset. When that’s in place, each stage tends to unfold smoothly and with purpose.

Tax Due Diligence Checklist

A well-crafted checklist is what turns a due diligence into a meaningful exercise. More than just a collection of documents, it acts as the backbone of the entire analysis—helping reconstruct the firm’s tax history, spot potential tax red flags, and verify whether the numbers truly add up. Here are the main elements of a checklist:

• Tax returns from the past 3–5 years;
• Notices or communications from tax authorities;
• Audit reports and related correspondence;
• Transfer pricing documentation and methodologies;
• Details of tax positions taken and elections made;
• Intercompany agreements with tax implications;

Of course, the checklist may vary depending on the group’s structure, the jurisdictions involved, and the complexity of the deal. Still, these elements provide a solid starting point for any thorough and well-documented tax review.

Common Red Flags Identified

During a tax due diligence review, certain red flags tend to surface more often than others—and spotting them early can make a big difference. Among the most telling signs are:

• Tax returns that haven’t been filed on time—or at all;
• Aggressive positions or clear signs of underreporting;
• Missing or incomplete transfer pricing documentation;
• Tax liabilities that haven’t been recorded or are still contingent;
• Ongoing disputes or litigation with local tax authorities;

These issues don’t always mean a deal should be abandoned, but they do call for extra caution, detailed analysis, and often, renegotiation of terms to account for the added risk.

Role of Tax Advisory Services

When dealing with tax due diligence—especially in cross-border or structurally complex cases—tax advisory services​ can make all the difference. They don’t just assist—they actively verify what internal teams might not have the tools or expertise to confirm on their own. Tax consultants and legal advisors typically step in to review historical filings, assess risk exposure, support tax planning, and evaluate compliance with local and international tax regulations.

In short, their job is to ask the right questions—especially the uncomfortable ones—and to provide clear, actionable answers before a deal moves forward.

Benefits of Thorough Tax Due Diligence

A well-executed tax due diligence provides much more than just compliance checks. It helps prevent unpleasant surprises down the line and gives buyers a clearer picture of what they’re signing up for—often strengthening their position at the negotiating table. For sellers, it’s a way to build credibility and foster transparency early on. In the bigger picture, it also allows both sides to plan ahead with more confidence, especially when it comes to post-deal integration or restructuring.

FAQs

What is tax due diligence?

An in-depth analysis of a firm’s tax situation to identify hidden liabilities prior to a transaction or investment, including aspects like what is the corporate tax rate.

What documents are needed for tax due diligence?

The most common are tax returns, audit notices, payment records, transfer pricing files, and related tax correspondence from the last 3-5 years.

How long does a tax due diligence process take?

The time required varies depending on the transaction size and jurisdiction but generally ranges from 2 to 6 weeks.

Who conducts tax due diligence?

Buyers usually engage external tax advisors or law firms, although sellers may also prepare in advance with internal or third-party advisors.

What is a tax due diligence checklist?

A structured list of documents and review points used to assess a company’s potential tax profile before closing a deal.

What are the risks of skipping tax due diligence?

Undisclosed liabilities, penalties, delayed closings, and overpaying due to unaccounted tax exposures.

References

OECD. (2022). Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022. Organisation for Economic Co-operation and Development. https://doi.org/10.1787/tpg-2022-en 

PwC. (2023). Tax due diligence: What buyers need to know before a deal. PricewaterhouseCoopers. https://www.pwc.com/gx/en/services/tax/tax-controversy-dispute-resolution/tax-due-diligence.html 

Deloitte. (2023). Tax due diligence in M&A transactions. Deloitte Insights. https://www2.deloitte.com/global/en/pages/tax/articles/tax-due-diligence