Tax Due Diligence in M&A Transactions

The need for tax due diligence isn’t always top of mind for buyers who are focusing on the how earnings analyses are conducted and other non-tax reviews. Tax review can help to uncover historical risks or contingencies that could affect the forecasted return of a financial model for an acquisition.

Tax due diligence is essential regardless of whether a business is C or S or an LLC, a partnership or an LLC or C corporation. These entities generally don’t pay entity level income taxes on their net income; instead, net income is passed out to partners or members or S shareholders (or at higher levels in a tiered structure) for taxation on ownership of individual. In this way, the tax due diligence approach should include examining whether there is the potential for assessment by the IRS or state or local tax authorities of an additional tax liability for corporate income (and associated penalties and interest) as URL a consequence of errors or incorrect positions discovered in audits.

Due diligence is more crucial than ever. Increased scrutiny by the IRS of foreign bank accounts that are not disclosed and other financial accounts, the expansion of state bases for sales tax nexus, changes in accounting methods, and an increasing number of states which have statutes against unclaimed property are just a few of many aspects that need to be considered as part of any M&A transaction. Based on the circumstances, not meeting the IRS due diligence requirements can result in penalties assessed against both the signer and the non-signing preparer under Circular 230.

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