Founders and leadership teams are usually focused on growth, product, and valuation (as they should be). But when a buyer starts digging in, tax is one of the fastest ways for risk to surface and for value to erode. Here are some of the most common issues I see come up, often when companies least expect it.

Important background: Due diligence

Buyer due diligence is a critical phase in any business sale where potential acquirers conduct a deep review of a company’s financial, tax, legal, and operational position before finalizing a transaction. During this process, buyers evaluate everything from financial statements and tax compliance to contracts, employee benefits, and operational risks. The goal is to validate the business’s performance and identify any risks that could impact valuation or deal terms.

For a deeper breakdown of the process and timeline, read Justin Nelson, Partner in our Transaction Advisory Services Group’s blog: How Long Does Due Diligence Take When Selling Your Business? A Timeline for Business Owners.

7 common due diligence tax issues

1. State tax exposure that’s bigger than expected- Many companies operate across multiple states without fully realizing where they’ve created tax obligations. Between evolving nexus standards and inconsistent state rules, it’s easy to miss filing requirements. During diligence, buyers will dig into this quickly, often uncovering years of exposure, along with penalties and interest. What may have seemed immaterial can add up fast.

Take this example: In one transaction, a company entering diligence assumed it only had tax obligations in its home state. However, once the buyer’s advisors reviewed employee locations, customer distribution, and contractor activity, they identified nexus in multiple additional states. The result was several years of unfiled returns, estimated penalties and interest, and a negotiated escrow holdback to cover potential exposure, despite the underlying business being fundamentally strong.

2. Sales tax gaps across products and services- Sales tax is no longer limited to tangible goods. Today, services, digital offerings, and bundled solutions are often taxable depending on the jurisdiction. The rules vary widely, and many companies unintentionally create exposure by not collecting or remitting in the right places. Even businesses with relatively simple offerings can end up with significant liabilities.

3. International compliance blind spots- Even companies that don’t view themselves as “global” may have cross-border elements like foreign vendors, remote employees, or international customers. That can trigger additional filing requirements, transfer pricing considerations, and indirect tax exposure. Missing filings or weak documentation tends to surface quickly in diligence, often with meaningful penalties attached.

4. R&D credits without support- Research & Development (R&D) credits can be a valuable asset, particularly in innovation-driven industries but only if they’re well documented. Too often, companies claim credits without maintaining the contemporaneous support needed to defend them. Buyers tend to discount (or disregard) credits that can’t be substantiated.

5. Unclear treatment of transaction costs- Transaction-related costs (legal fees, success fees, financing costs) add up quickly. But the tax treatment isn’t always straightforward. Without proper analysis and documentation, companies may miss out on deductions or create uncertainty that becomes a negotiation point late in the process. 

6. Missed or incorrect accounting method elections- Decisions around revenue recognition, capitalization, or depreciation may seem routine, but they can create long-term tax implications. During diligence, buyers will assess whether these methods were applied correctly, and what it would take to fix them. Any required changes can be viewed as both a cost and a risk.

7. Overlooked limitations on tax attributes- Net operating losses and tax credits can carry real value but only if they’re usable. Ownership changes over time can limit their future benefit, and if that analysis hasn’t been done in advance, buyers may assign little to no value. That can directly impact deal economics.

Why this matters

In almost every deal, these issues directly impact price and terms. At best, they lead to purchase price adjustments or escrow holdbacks. At worst, they can stall or stop a deal entirely. The companies that navigate diligence most successfully aren’t the ones with zero issues, they’re the ones who understand their exposure, have documentation ready, and can clearly explain their position.

From my experience, proactive tax planning is about protecting the value you’ve worked hard to build (not just compliance).

Andrew Tavares is a tax advisor who helps business owners and executives prepare for and navigate complex transactions with confidence. Having worked with over 100 companies across a wide range of industries, he brings deep experience in uncovering and addressing tax issues that surface during due diligence. His work is centered on proactive planning, minimizing surprises, and helping clients preserve deal value from start to finish.