Services
Tax Due Diligence for Business
Acquisitions in DFW
At Parr & Ibarra CPA, Adan Ibarra leads tax due diligence engagements with a background that is uncommon in this space: a licensed CPA with nearly 20 years of tax and financial experience and a Juris Doctor education that allows him to engage directly with the purchase agreement, the representations and warranties, and the legal structure of the transaction — not just the tax returns. For buyers, sellers, attorneys, and investment bankers in DFW who need a CPA who can operate credibly at the transaction table, this matters.
We work with buyers, sellers, private equity groups, and their advisors on transactions in the DFW lower middle market and across Texas.
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What a Tax Due Diligence Engagement Examines
Our Services
Tax due diligence goes significantly beyond reviewing the target company’s tax returns. It is a structured investigation of every tax exposure that could affect the transaction — the purchase price, the structure, or the buyer’s post-closing liability.
Federal Income Tax Compliance
We review three to five years of federal returns and assess whether positions are supportable and whether any create audit risk for the buyer. We identify open statute years, prior examination history, outstanding IRS correspondence, and — for S corporations — the validity of the S election and any built-in gains exposure from a prior C corporation period.
State and Local Tax Compliance
State tax exposure is consistently underestimated in acquisitions. We assess nexus in unfiled states, sales tax compliance across all jurisdictions, and income tax apportionment for multistate operations. For Texas businesses, we evaluate franchise tax compliance and Comptroller examination history. For businesses with out-of-state customers, we assess economic nexus exposure under Wayfair.
Payroll Tax Compliance
Uncorrected payroll tax issues can produce personal liability for the buyer's management team after closing under the trust fund recovery penalty. We review payroll tax filings, deposit history, W-2 and 1099 issuance, and worker classification. Misclassification — treating employees as contractors — is one of the most common and expensive due diligence discoveries. We quantify the exposure where it exists.
Entity Structure and Tax History
We assess the entity type, any prior conversions or restructurings, intercompany relationships, and structural issues that affect how the transaction can be executed. For S corporations this includes the accumulated adjustments account and distribution recharacterization risk. For partnerships and LLCs, we review special allocations, built-in gain positions, and Section 754 elections.
Transaction Structure Analysis
We evaluate the proposed structure from both parties' perspectives and identify alternatives that improve after-tax outcomes without changing deal economics. For asset purchases we model the purchase price allocation under Section 1060. For stock purchases we evaluate whether a Section 338(h)(10) election makes sense given each party's tax position.
Tax Attributes
We evaluate NOL carryforwards, R&D credits, and other tax attributes, and assess whether Section 382 ownership change limitations would restrict their use after closing. Buyers pricing a transaction based on the value of tax attributes need to know what actually survives before signing.
Representations, Warranties, and Indemnification
Adan Ibarra's legal education allows him to engage directly with the purchase agreement — not just deliver findings to counsel after the fact. We identify gaps between the seller's tax representations and what due diligence revealed, and provide counsel with specific language for additional representations, carve-outs, or indemnification provisions that protect the buyer's post-closing position.
CPA and Legal Education
Adan Ibarra’s Juris Doctor education allows him to engage directly with the purchase agreement throughout the due diligence process, not just deliver findings to counsel after the fact. He understands the legal effect of a tax representation, the difference between a specific indemnity and a general basket, the implications of a survival clause for tax matters, and how a representations and warranties insurance policy interacts with the contractual protections in the purchase agreement.
For M&A attorneys who want a CPA partner who can operate in the legal context of a transaction and not just the accounting context, this background is a meaningful differentiator.
What the Tax Due Diligence Report Includes
The deliverable of a tax due diligence engagement is a written report organized to be useful to both the deal team and legal counsel. A standard report includes:
Executive Summary
A concise summary of key findings, quantified exposures, and specific recommendations for how each should be addressed in the transaction. This section is written to be useful to buyers, investors, and lenders who need a high-level view before engaging with the detail.
Entity and Structure Analysis
A description of the target's legal and tax structure, the history of any restructurings or conversions, and any structural issues that affect the transaction.
Federal Tax Compliance Findings
A year-by-year summary of federal tax return filing history, open statute years, prior examination history, identified compliance issues, and tax positions that carry audit risk.
State and Local Tax Findings
A state-by-state nexus analysis, sales tax compliance assessment, and identification of any unfiled state returns or unregistered tax obligations.
Payroll Tax and Worker Classification Findings
A review of payroll tax compliance, deposit history, and worker classification, with quantified exposure for any identified misclassification issues.
Tax Attribute Analysis
An assessment of available NOLs, credits, and other tax attributes, including any Section 382 limitations that would apply after closing.
Our Due Diligence Process
Engagement and Conflict Check We begin with a conflict check and a brief scoping call to understand the transaction — the parties, the deal size, the proposed structure, and the timeline. We confirm the engagement in writing before any confidential information is shared.
Document Request We provide a targeted document request list covering federal and state tax returns, payroll records, prior examination history, operating agreements or shareholder agreements, and any other documents needed to complete the analysis. We scope the request to the transaction — not a generic checklist that produces documents we do not need.
Analysis and Attorney Coordination We analyze the documents and maintain regular communication with deal counsel throughout. As findings develop, we share preliminary observations so the deal team can assess their impact on the transaction in real time rather than waiting for the final report.
Report Delivery We deliver a written tax due diligence report in a format that is useful to all members of the deal team — the buyer, the buyer’s attorney, the lender, and any financial advisors. We are available to walk through the report findings with all parties and answer questions during the closing process.
Post-Closing Support After closing, we assist buyers with purchase price allocation, Form 8594 preparation, post-closing tax integration, and any representations and warranties claims that involve tax issues identified during due diligence.
Buy-Side Tax Due Diligence
Buy-side due diligence is commissioned by the buyer to identify what they are acquiring — including all of its tax exposures — before the transaction closes. The deliverable is a tax due diligence report that documents findings, quantifies identified exposures, and provides specific recommendations for how each finding should be addressed in the purchase agreement, the purchase price, or the transaction structure.
Buyers who skip tax due diligence or rely on representations and warranties insurance without understanding the underlying exposures are accepting risk they have not priced. A single payroll tax misclassification issue or a state nexus problem can produce a liability that exceeds the entire purchase price reduction that due diligence would have produced.
Sell-Side Tax Due Diligence
Sell-side due diligence — sometimes called vendor due diligence — is commissioned by the seller before going to market. The goal is to identify and address potential issues before a buyer finds them, which gives the seller control over how issues are disclosed and positioned rather than discovering them under deadline pressure during buyer due diligence.
Sellers who have conducted their own due diligence can present a cleaner financial and tax record to buyers, negotiate from a position of transparency rather than defensiveness, and avoid the last-minute price reductions or deal restructurings that buyer discoveries produce. For sellers working with an investment banker or business broker, sell-side tax due diligence is increasingly standard in DFW transactions above $5M.
Frequently Asked Questions
Knowledge Center
What is tax due diligence and how is it different from financial due diligence?
Financial due diligence — often performed as a quality of earnings analysis — focuses on the target company’s historical and normalized earnings, revenue quality, working capital, and financial projections. Tax due diligence focuses specifically on the company’s tax compliance history, open tax liabilities, structural tax issues, and the tax consequences of the proposed transaction structure. Both are important in a business acquisition and the two workstreams should coordinate but are typically performed by different teams. A quality of earnings report will not identify a payroll tax misclassification issue or a state nexus problem. Tax due diligence will.
When in the transaction process should tax due diligence begin?
Ideally, after a letter of intent is signed and before the purchase agreement is negotiated. Starting due diligence early gives the deal team time to address findings in the transaction structure, negotiate appropriate representations and indemnification, or adjust the purchase price before closing. Starting too late — after the purchase agreement is substantially negotiated — limits what can be done with the findings. For sell-side due diligence, the right time is before the business goes to market.
How long does tax due diligence take?
Timeline depends on the complexity of the target, the availability and quality of the documents provided, and the number of states and entity structures involved. For a straightforward single-entity business with clean records, a tax due diligence report can typically be delivered in two to three weeks from receipt of complete documents. For multi-entity structures, multistate operations, or targets with complex histories, four to six weeks is more realistic. We communicate timeline expectations at the start of every engagement and flag immediately if document availability affects the schedule.
What documents are typically needed for tax due diligence?
At a minimum: federal income tax returns for the prior three to five years, state income and franchise tax returns for all states where the business files, payroll tax returns (Forms 941 and 940) for the prior three years, sales tax returns for all applicable states, any IRS or state examination reports or correspondence, the operating agreement or shareholder agreement, and any prior purchase or sale agreements involving the business. We tailor the document request to the specific transaction and do not request documents we do not need.
Can tax due diligence findings change the purchase price?
Yes — and this is one of the primary reasons buyers commission it. Quantified tax exposures — a state nexus problem, a worker misclassification issue, a prior examination adjustment that was not correctly resolved — give the buyer a basis for price adjustment or escrow holdback. In our experience, the cost of tax due diligence is routinely recovered through purchase price adjustments or avoided post-closing liabilities that would otherwise have been discovered without recourse.
What is a Section 338(h)(10) election and when does it apply?
A Section 338(h)(10) election allows a buyer to treat a stock acquisition of an S corporation or a subsidiary of a consolidated group as an asset acquisition for tax purposes. The buyer gets a stepped-up basis in the target’s assets — which increases future depreciation and amortization deductions — while the legal form of the transaction remains a stock purchase. The election requires the seller’s consent and has specific tax consequences for the seller that must be modeled before the parties agree to it. Whether a 338(h)(10) election makes economic sense depends on the target’s asset composition, the purchase price, the buyer’s tax rate, and the seller’s basis — analysis that is part of every stock purchase due diligence engagement involving an S corporation target.
Do you work with attorneys and investment bankers directly?
Yes. We work alongside deal counsel and financial advisors throughout the engagement and communicate directly with all members of the deal team. Our written reports are designed to be used by attorneys in negotiating the purchase agreement and by financial advisors in evaluating the transaction structure. We are available for calls with lenders, counsel, and investors as needed during the closing process.
Contact Us
Ready to Discuss a Transaction?
Tax due diligence engagements require a conflict check before any confidential information is shared. Contact Parr & Ibarra CPA to initiate a conflict check and discuss the scope of your transaction.
Parr & Ibarra CPA serves buyers, sellers, attorneys, and investment bankers on transactions in the DFW lower middle market and across Texas from offices in Hurst, Keller, Grapevine, and Addison.
* Please do not send confidential transaction documents until the firm completes a conflict check and confirms the engagement in writing.
