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Buyers are often more concerned with the quality of the earnings analysis and other non-tax reviews. Tax reviews can help uncover historical risks or contingencies that could affect the financial model’s forecasted return for an acquisition.
No matter if a business is an C or S corporation, or is an LLC or a partnership, the need to conduct tax due diligence is essential. The majority of these entities do not pay entity level tax on their net income; instead net income is distributed out to members or partners or S shareholders (or at higher levels in a tiered structure) for individual ownership taxation. As a result, the tax due diligence effort must include examining whether there is a possibility for assessment by the IRS or state or local tax authorities of additional tax liabilities for corporate income (and associated interest and penalties) due to errors or incorrect positions discovered in audits.
The need for a robust due diligence process has never been more critical. The IRS is stepping up its scrutiny of accounts that aren’t disclosed in foreign banks and financial institutions, the expansion of the bases used by states for the nexus between sales and tax, and the growing number of states that impose unclaimed property laws are some of the issues that must be considered before completing any M&A deal. Circular 230 can impose penalties on both the signer of the agreement and the non-signing preparer, if they fail to adhere to the IRS’s due diligence requirements.
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