What are the risks when acquiring a business with poor quality tax reporting?

First, since owners are trying to understate taxable profits, tax records contain numbers that are not suitable for immigration.

Second, when the owner corrects the reports and sends the updated version to the tax office, they may ask what caused profits to increase so dramatically.

If the tax authority wants to conduct an audit after the purchase of the business, then it will be impossible to correct the documentation retroactively.

Therefore, to avoid getting into such a situation, you need to remember:

When you check out a business, the owner will be sure to say that profits are lower on tax returns and he is getting a lot of cash. In this case, it is necessary to put a condition that he does everything correctly for the last reporting period and send a full real report to the tax office.

Moreover, the owner will have to pay tax a higher tax for this period because the stated income will be higher than before. Then you can safely hand over the company documents to an immigration lawyer without doubting whether it is suitable for the immigration process or not.

If there is a separation of responsibility in the contract (which is a plus for you), the seller's responsibilities should be stated explicitly. If a tax officer comes to you with an audit in the future and issues a tax debt of $10,000, the seller will have to pay this amount because the debt appeared during his ownership.

The check should look like the following.

The first thing you should check is how true the reports provided by the owner are. This allows you to assess what requirements will need to be put forward at the end of the audit. For example, say: "Only if you make adjustments, we will close the deal."

You should make sure that those taxes that had to be paid for real reports were paid in full. This is all revealed by the owner providing you with a tax return transcript that shows the actual debt.

Payroll tax check. If there is a suspicion that workers receive money “under the table,” then taxes on their salaries will also be understated. You will have to pay the entire salary for the immigration petition. First, it will give you an understanding that you have real employees, not illustrative ones. Second, you don`t want employees to complain about you for non-payment.

As a result, your payroll tax expenses should go up. Therefore, you need to make a recalculation of how much you will pay to buy the company.

When we talk about the business` market capitalization, we need to understand what it can be if the business is conducted according to the rules. Then tell the owner: “We counted everything and saw that the profit would be less. Therefore, it is necessary to conduct additional negotiations on the price.”

You can learn more about how a business audit should be conducted in our class.

After reading this article, you may also have questions about whether you should carry out the verification yourself. To understand the verification process, read the article "Who checks the business".

You also always need to remember the time frame of the due diligence, because you can’t delay this matter.

The main thing to remember:

Проверка налоговой документации 3

  • Tax reports never contain truthful information about financial performance.
  • Tax reports are very important for an immigration petition. They are the only documents that are considered by immigration, so you cannot fail to provide them.
  • Tax reporting doesn`t guarantee the absence of arrears.

To avoid gross mistakes when checking both tax documentation and the business as a whole, read our article.

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