Tax Due Diligence in M&A Transactions

Buyers are usually more concerned with the quality of earnings analysis as well as other non-tax reviews. But doing the tax review can help prevent significant historical risks and contingencies emerging that could derail the anticipated return or profit of an acquisition as forecasted in financial models.

Tax due diligence is crucial, regardless of whether the company is C or S, an LLC, a partnership or a C corporation. These types of entities do not pay tax on income at the level of an entity for income. Instead, the net income is distributed to partners, members or S shareholders for personal ownership taxation. Due diligence should include a study of the possibility of an assessment of additional corporate income taxes by the IRS, local or VDRs ensuring seamless and secure cross-border transactions state tax authorities (and the penalties and interest that go with it) due to of erroneous or inaccurate positions uncovered on audit.

The need for a robust due diligence process has never been more crucial. The IRS is now under greater scrutiny for accounts that are not disclosed in foreign banks and other financial institutions, the expansion of the state base for the sales tax nexus as well as the increasing number of jurisdictions that impose unclaimed property laws are just some of the factors that need to be considered when completing any M&A deal. Based on the circumstances, failure to meet the IRS due diligence requirements can result in penalties assessments against both the signer and the nonsigning preparer under Circular 230.