Given the current lull in the mergers and acquisitions deal market, this is an opportune time for private equity funds to review the tax posture of portfolio companies before any underlying conditions materialize into costly symptoms.

By proactively addressing potential issues such as sales tax nexus, independent contractor classification, and transfer pricing, taxpayers can minimize risks on exit.

Tax Due Diligence Report

First, dust off the cobwebs from the tax due diligence report that was done when the company was acquired, including the tax due diligence reports for any add-ons. Confirm that the chief financial officer and tax advisers have addressed any tax issues that were raised in the reports.

Tax Law

Then, meet with the CFO and tax advisers to ensure they’re on top of changes to the business and tax law. This may include identifying whether the company has state income or sales tax nexus in additional states. The Supreme Court’s Wayfair decision completely changed the sales tax nexus landscape. Since then, states have applied economic nexus concepts to establish state income tax nexus, including Hawaii, Maine, Massachusetts, Oregon, and Pennsylvania.

Sales tax remains the most common issue among targets, with nexus and taxability often overlooked. This is particularly the case for cloud computing, software as a service, and similar businesses. Several states impose sales tax on information services, and understanding the statutory definition is critical to assessing taxability.

Independent Contractors

Next is reviewing the use of independent contractors. IRS agents revel in raising this issue, and several states have adopted strict “ABC” standards for classifying workers as independent contractors or employees. The Department of Labor also released new rules in January for classifying workers.

This issue arises in many businesses but is a prevalent one for transportation companies that rely on contractor drivers and on consulting businesses that rely on contractor expertise and experience. It’s not just a payroll tax issue but a much larger issue encompassing worker rights, including overtime and benefits.

Transfer Pricing

For multinational companies, the IRS has announced that it is using a portion of its expanded budget to focus on transfer pricing. Changes in the services that related companies perform for each other may affect transfer pricing, and a stale transfer pricing study may not be sufficient to keep you out of trouble in an IRS audit.

Foreign Bank Account Report

Another issue for multinational companies is Foreign Bank Account Report (FBAR, or FinCEN Form 114) filings. A US company with a foreign bank account, or an officer with authority over a foreign bank account, must report annually. The purpose is to prevent tax evasion and other financial crimes. Penalties for failure to file can range from $10,000 for each non-willful failure to $100,000 (or 50% of the account value if greater) for each willful failure. The penalty is imposed for each year that the company fails to report.

Limited Partner Compliance Audits

Finally, for the limited partners in the investment funds, the IRS is ramping up its audits of compliance for self-employment contribution payments by limited partners. There is a technical issue of who is and isn’t a limited partner for self-employment contribution purposes, but the IRS is proceeding full steam ahead in auditing this issue.

Prioritize Tax Health

Neglecting these tax checkups may not create any near-term problems, but continually neglecting tax health is a long-term gamble that business can’t afford and will likely be identified on exit.

Originally published in Bloomberg Tax.