In the fall of 2019, the Treasury Inspector General for Tax Administration (TIGTA) or the auditor for the IRS issued a report recommending the IRS develop a strategy to ensure that companies going through a merger or acquisition are tax compliant and pay the appropriate amount of federal tax.
What does this mean for corporate buyers or sellers?
In 2020 and beyond, parties involved in a merger or acquisition, particularly large dollar, complex transactions or tax-free transactions, can expect greater scrutiny from the IRS.
According to the Institute for Mergers, Acquisitions and Alliances, 14,540 mergers and acquisitions closed in 2018 in the United States with a value of almost $1.9 trillion. In the last 10 years in the United States, there have been approximately 120,000 mergers and acquisitions with a total value of $15.3 trillion.
Because of the large values of these transactions, the IRS wants all parties involved to pay the appropriate taxes. These transactions generally result in a large amount of taxes needing to be paid. For example, when the IRS auditors reviewed M&A transactions in the large business and international division, the auditors proposed adjustments averaging $15.2 million per transaction between 2015 and 2018. These adjustments give the IRS an incentive to carefully review merger and acquisition transactions to confirm the correct amount of tax was paid or is to be paid.
While taxes are generally paid in a merger or acquisition transaction, in some instances the IRS permits tax-free transactions if the deal meets certain technical requirements. Taxpayers engaging in a tax-free reorganization must notify the IRS with their next tax return by including a statement explaining that the transaction was a tax-free transaction. Previously, the IRS would review these statements as a way to collect information about the merger or acquisition; however, the IRS does not currently use this data to determine whether the taxpayer was compliant with the tax code.
Final Thoughts
Moving forward, the IRS will determine whether more tax forms are required to ensure taxpayers are compliant rather than just collecting information about the transaction. For business owners considering a sale, acquisition or merger, we recommend working with tax and legal professionals experienced in the merger and acquisition process. These professionals can help create a deal structure that meets the parties’ goals while also being compliant for tax purposes. You can learn more about TIGTA’s report here or if you would like to discuss with us your questions about the merger or acquisition process, we can be reached at 913.815.8481.