Tax Returns During Due Diligence

searcher profile

October 03, 2019

by a searcher in New York, NY, USA

During due diligence are you accepting the tax returns provided by the seller/ broker? I've seen that some people are and some are requiring that the seller allow them to get the returns direct from the IRS. Just looking to see which direction is most taken.

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commentor profile
Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
As Lisa mentions, if an SBA lender is involved, they will order the transcript (using the form known as the 4506-T). This allows them to compare the numbers from tax returns provided to the buyer with the ones submitted to the IRS by the seller. A seller should not object to this, and if they balk, remind them that if they have gotten a mortgage in the last 10 years, they signed a 4506-T for the mortgage lender. If you are not using a bank, the IRS just made it a lot harder for an individual to obtain a 4506-T. Starting in July 2019, it stopped sending the transcript to third parities, unless they go through an Income Verification Express Service (IVES). Otherwise it is mailed to the taxpayer (seller), and that sort of defeats the purpose.
commentor profile
Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
Tax returns from the Seller are acceptable and what we rely on when doing confirmatory tax due diligence and we do not request transcripts. As stated above, the IRS only provides transcripts, which do not look at all like a tax return and can be difficult to read. Transcripts are so bad that when under audit the IRS agent will request copies of the tax returns from the taxpayer. In my opinion, transcripts are only good to confirm that the numbers provided in the tax return are the ones filed with the IRS. The only time we would go to this level of due diligence is if the Buyer wanted a full scope, which is rarely requested due to substantially higher fees when compared to confirmatory tax due diligence.
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