Buyers are typically more concerned about the quality of the analysis of earnings and other non-tax reviews. But doing the tax review could prevent substantial historical exposures and contingencies from being discovered that could impact the expected return or profit of an acquisition that is forecast in financial models.
Tax due diligence is vital regardless of whether a business is C or S or a partnership, an LLC or a C corporation. These entities do not have to pay taxes at the level of their entity on their income. Instead, the net income is divided among members, partners or S shareholders for personal ownership taxation. Due diligence should include a review of the possibility of a tax assessment of additional corporate income taxes by the IRS or other local or state tax authorities (and the associated penalties and interest) due to of errors or incorrect positions discovered on audits.
Due diligence is more critical than ever. The IRS is stepping up its scrutiny of undisclosed accounts in foreign banks and financial institutions, the expanding of the state bases for the sales tax nexus as well as the increasing number of states that impose unclaimed property laws are just some of the issues that must be considered before completing any M&A deal. Circular 230 can impose penalties for both the party signing the agreement and the non-signing preparation company if they fail to meet the IRS’s due diligence requirements.