Taxterity research

Building a federal tax diligence issue list for a business acquisition

Reviewed 2026-09-15 · AI-assisted draft and editing; sources and limitations remain visible for independent review.

Answer: Scope the diligence before the data room opens. A federal tax issue list for an operating target is built from the provisions that create exposure, not from whatever documents happen to arrive, and eight headings cover most of the ground: entity classification and the elections behind it, method of accounting and any pending change, which assessment years are still open, attribute limitations triggered by the transaction itself, payroll and withholding including worker classification, transferee and successor exposure, the asset-versus-equity reporting record, and the elections currently in effect that a buyer will inherit or lose. Two of these drive scope for the rest. The open-years question under 26 U.S.C. 6501 sets the time boundary: three years from filing under 6501(a), six years where more than twenty-five percent of gross income was omitted under 6501(e)(1)(A), and unlimited where a return was false or fraudulent with intent to evade tax or was never filed under 6501(c)(1) and 6501(c)(3), with consents in writing extending the period under 6501(c)(4). The classification question under 26 CFR 301.7701-3 determines whose return the historic exposure sits on. Write each heading as a question, the provision, the document that would evidence it, and what a bad answer costs, and the document request writes itself.

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Scope

Jurisdiction: United States — federal

Tax periods: Open assessment years under IRC 6501, Checked 2026-09-15

Assumptions

Exclusions

How to use an issue list before the documents arrive

An issue list is a set of questions with a provision attached to each. Write four fields per line: the question in plain words, the federal provision that creates the exposure, the document that would answer it, and the consequence if the answer is adverse. The document request is then a mechanical derivation of the third field, which is the point. Requests assembled from a generic template collect volume; requests derived from provisions collect answers.

Sequence matters as well. Settle open years and entity classification first, because together they decide which entity's returns for which periods anything else attaches to.

1. Entity classification and the elections behind it

Ask what the target and each subsidiary is for federal tax purposes, when it became that, and how. Under 26 CFR 301.7701-3(b)(1) a domestic eligible entity defaults to a partnership if it has two or more members and is disregarded as separate from its owner if it has a single owner, and an election is necessary only when an entity chooses a classification other than the default. Where an election was made, it is filed on Form 8832, and under 301.7701-3(c)(1)(iii) the effective date cannot be more than seventy-five days before, or more than twelve months after, the filing date.

The trap is the lock-in. Under 301.7701-3(c)(1)(iv), an eligible entity that elects to change its classification cannot change classification by election again during the sixty months succeeding the effective date, although the Commissioner may permit an earlier change where more than fifty percent of the ownership interests at the effective date of the later election are held by persons who held no interest on the filing date or the effective date of the prior election. A structure step the deal contemplates may therefore not be available on the timetable assumed. Request the filed Form 8832 with evidence of filing, not a statement that an election was made.

2. Method of accounting, and any change in flight

Ask what methods the target uses, when each was adopted, whether any change has been requested, and whether any adjustment from a prior change is still being taken into account. The IRS describes Form 3115 as the form filed to request a change in either an overall method of accounting or the accounting treatment of any item.

The diligence question is not only whether a method is permissible but whether a change is pending or recently completed, because an in-flight change carries continuing adjustments into the buyer's periods. Request filed Forms 3115 with attachments and any consent or acknowledgment received.

3. Open assessment years

Fix the time boundary of the whole exercise. The general rule in 26 U.S.C. 6501(a) is that tax must be assessed within three years after the return was filed, with a return filed early treated under 6501(b)(1) as filed on the last day prescribed. Under 6501(e)(1)(A) the period is six years where the taxpayer omits from gross income an amount in excess of twenty-five percent of the gross income stated on the return, and the same subparagraph reaches certain omissions over five thousand dollars attributable to assets reportable under section 6038D. Under 6501(c)(1) and 6501(c)(3) there is no limit where the return was false or fraudulent with intent to evade tax, or where no return was filed.

Consents change the answer in both directions. Under 6501(c)(4) the Service and the taxpayer may agree in writing to extend the period, and the extended period may itself be extended by further written agreements made before the earlier one expires. Request every executed consent, not merely a list of years under examination, because a consent silently reopens a year the buyer assumed was closed.

Treat the three-year, six-year and unlimited rules as the starting grid rather than the whole section. Section 6501 also carries subject-specific periods that are easy to miss because they sit at the end, and the list grows: a six-year period for an assessable payment under the employer shared responsibility provision was added in 2024, and a further six-year period for a deficiency attributable to an error in the prohibited-foreign-entity determination was added by Public Law 119-21 in 2025, applicable to taxable years beginning after July 4, 2025. Read the section to its end and read its amendment notes, because a target's exposure may sit under one of those rather than under the general rule.

4. Attribute limitations triggered by the deal itself

Losses and other attributes that survive the closing may not be usable at the rate the model assumes. Under 26 U.S.C. 382(a), the taxable income of a new loss corporation for a post-change year that may be offset by pre-change losses cannot exceed the section 382 limitation for that year, and 382(b)(1) computes that limitation as the value of the old loss corporation multiplied by the long-term tax-exempt rate. An ownership change is defined in 382(g)(1) by reference to an owner shift involving a five percent shareholder or an equity structure shift after which the percentage of stock owned by one or more five percent shareholders has increased by more than fifty percentage points over the lowest percentage owned during the testing period.

Two further points belong on the list. A loss corporation under 382(k)(1) includes a corporation entitled to use a net operating loss carryover or having a net operating loss in the year of the change, and reaches disallowed interest carryforwards and net unrealized built-in losses. Under 382(c), failing to continue the old loss corporation's business enterprise during the two-year post-change period drives the limitation to zero except as to certain recognized built-in gains. Request the prior-ownership-change analysis and the section 382 studies rather than only the attribute schedule.

5. Payroll and withholding, starting with worker classification

Ask how the target classifies its workers and on what basis, and how large the contractor population is relative to headcount. The IRS describes Form SS-8 as the form firms and workers file to request a determination of the status of a worker for purposes of federal employment taxes and income tax withholding, which is the formal route to the question the diligence list is asking informally.

Treat the exposure as recurring rather than one-off. Misclassification questions repeat across every open period, which is why heading three governs the size of this heading. Request the contractor register, any prior determination requests or examinations, and the basis on which the classification was decided.

6. Transferee and successor exposure

An asset deal does not reliably leave historic tax behind. Under 26 U.S.C. 6901(a), the liability of a transferee of property, at law or in equity, and the liability of a fiduciary, are assessed, paid and collected in the same manner and subject to the same provisions and limitations as the tax to which the liability relates, covering income, estate and gift taxes and, for other taxes, liabilities arising on the liquidation of a partnership or corporation or on a reorganization within the meaning of section 368(a).

The periods run past the target's own. Under 6901(c), assessment against an initial transferee is within one year after the expiration of the period of limitation for assessment against the transferor, a transferee of a transferee gets a further year subject to an outer limit measured from the original transferor's period, and a fiduciary is reached within one year after the liability arises or the collection period ends, whichever is later. Ask which entity is transferring what, and reconcile the answer against the open-years table from heading three.

7. The asset-versus-equity reporting record

If the target has previously bought or sold a business, the reporting record is a diligence artifact. The IRS states that both the seller and the purchaser of a group of assets that makes up a trade or business must use Form 8594 to report the sale where goodwill or going concern value attaches, or could attach, to the assets and the purchaser's basis is determined only by the amount paid.

Two things matter here. The filed form evidences the basis positions the target has been carrying, and a mismatch between the buyer's and the seller's forms in a prior deal is a live exposure the acquirer would inherit. Request prior Forms 8594 from both sides where available.

8. Elections in effect that the deal will keep or break

Close the list by inventorying elections currently in force, the year each was made, the document evidencing it, and whether the contemplated structure preserves or terminates it. Classification elections carry the sixty-month constraint noted in heading one; accounting-method positions carry continuing adjustments from heading two. An election inventory that names the evidencing document for each entry is the deliverable, and the absence of that document is itself a finding.

Where an item cannot be evidenced, record it as an open fact with the party who can supply it and the consequence if it is missing, rather than resolving it by assumption.

Turning the list into work

Each heading above is stated at issue-list level on purpose. Depth belongs to the item that survives triage, which is usually two or three of the eight. The sibling page How to structure a source-linked tax memo for a contested deduction gives the memo architecture for those, and Weighing conflicting tax authorities: venue, nonacquiescence and later guidance covers the case where the authorities on a surviving item point in different directions.

A workable next step is to run one Federal Tax Memo in Taxterity per surviving heading, with the target's actual facts, and verify every provision and period yourself against the official text before the finding reaches a diligence report.

Related research

Official sources

  1. eCFR: 26 CFR 301.7701-3 — Classification of certain business entities — Section 301.7701-3(a) elective regime; (b)(1) domestic defaults; (c)(1)(i) election on Form 8832; (c)(1)(iii) effective-date window; (c)(1)(iv) sixty-month limitation. eCFR title 26 as of 9/14/2026
  2. IRS: About Form 8832, Entity Classification Election — Purpose statement: an eligible entity uses Form 8832 to elect classification as a corporation, a partnership, or an entity disregarded as separate from its owner
  3. IRS: About Form 3115, Application for Change in Accounting Method — Purpose statement: file to request a change in either an overall method of accounting or the accounting treatment of any item
  4. 26 U.S.C. 6501 — Limitations on assessment and collection — Subsections (a), (b)(1), (c)(1), (c)(3), (c)(4), (e)(1)(A), plus (n) and (o) special periods; 2025 Amendments note, Pub. L. 119-21 added subsec. (o). Text in effect on September 14, 2026
  5. 26 U.S.C. 382 — Limitation on net operating loss carryforwards and certain built-in losses following ownership change — Subsections (a), (b)(1), (c), (g)(1) and (k)(1). Page states text contains laws in effect on September 14, 2026
  6. 26 U.S.C. 6901 — Transferred assets — Subsection (a) transferee and fiduciary liability; subsection (c)(1)-(3) periods for an initial transferee, a transferee of a transferee, and a fiduciary. Page states text contains laws in effect on September 14, 2026
  7. IRS: About Form SS-8, Determination of Worker Status — Purpose statement: firms and workers file to request a determination of worker status for federal employment taxes and income tax withholding
  8. IRS: About Form 8594, Asset Acquisition Statement Under Section 1060 — Who must file: both seller and purchaser of a group of assets making up a trade or business where goodwill or going concern value attaches or could attach

Limitations