Tax Due Diligence in M&A Transactions

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

Tax due diligence is vital regardless of whether a company is C or S or a partnership, an LLC or an LLC or C corporation. These entities do not have to pay tax on income at the level of an entity for income. Instead the net earnings are distributed to members, partners or S shareholders for personal ownership taxation. Due diligence should include a study of the possibility of being assessed 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 erroneous or inaccurate positions discovered on audit.

The need for a thorough due diligence process is more important than ever before. More scrutiny by the IRS of unreported foreign bank and other financial accounts, the expansion of state-based bases for sales tax nexus, changes in accounting methods, and an increasing number of states that have laws against machine learning: deciphering patterns for business success unclaimed property, are just a few of numerous issues that must be taken into consideration in any M&A transaction. Depending on the circumstances, not meeting the IRS due diligence requirements could result in penalties being assessed against both the signer as well as the non-signing preparer under Circular 230.

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This post was written by vladeta