Tax Due Diligence in M&A Transactions

Buyers are typically more concerned about the quality of earnings analysis as well as other non-tax reviews. But completing a tax review can prevent significant historical risks and contingencies from being discovered that could impact the anticipated profit or return of an acquisition forecasted in financial models.

No matter if a business is one of the C or S corporation, or an LLC or a partnership it is essential to conduct tax due diligence is essential. These entities generally do not 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 https://allywifismart.com/dropbox-virtual-data-room-review/ in a tiered structure) to be taxed on individual ownership. Due diligence should include a thorough examination of the possibility of being assessed of additional corporate income taxes by the IRS and local or state tax authorities (and the penalty and interest associated with it), as a result of incorrect or erroneous positions discovered on audit.

Due diligence is more important than ever. More scrutiny by the IRS of foreign bank accounts that are not disclosed and other financial accounts, the growth of state bases for sales tax nexus, the introduction of changes in accounting procedures, and an increasing number jurisdictions imposing unclaimed property statutes, are just a few of the many aspects that need to be considered in any M&A transaction. Depending on the circumstances, not meeting the IRS’ due diligence requirements can result in penalties assessments against both the signer and non-signing preparer under Circular 230.