Tax Due Diligence in M&A Transactions

Buyers are typically more concerned about the quality of the earnings analysis and other non-tax reviews. Tax reviews can help identify historical exposures or contingencies that could affect the financial model’s forecasted return on the acquisition.

Tax due diligence is crucial, regardless of whether the company is C or S, a partnership, an LLC or a C corporation. These types of entities typically don’t pay entity level income taxes on their net income. Instead net income is passed out to members or partners or S shareholders (or at higher levels in a tiered structure) for taxation on ownership tax preparation due diligence of individual. Due diligence should include a thorough examination of the possibility of a tax assessment of additional corporate income taxes by the IRS, state or local tax authorities (and the penalty and interest associated with it), as a result of mistakes or incorrect positions discovered on audit.

The need for a robust due diligence process has never been more critical. The IRS is now under greater scrutiny for accounts that are not disclosed to foreign banks and financial institutions, the expansion of the state bases for the sales tax nexus, and the increasing number of jurisdictions that impose unclaimed property laws are just a few of the issues that must be considered when completing any M&A deal. Depending on the circumstances failure to meet the IRS’ due diligence requirements can result in penalties assessed against both the signer and non-signing preparer under Circular 230.

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