Buyers are usually more concerned about the quality of earnings analysis and other non-tax reviews. Tax review can help to identify historical exposures or contingencies that could impact the forecasted return of a financial model for an acquisition.
Tax due diligence is vital regardless of whether a company is C or S, an LLC, a partnership or an LLC or C corporation. These types of entities do not pay income tax at the entity level on their income. Instead the net earnings are distributed to partners, members or S shareholders for the purpose of individual ownership taxation. This means that the tax due diligence focus must include a review of whether there is the potential for assessment by the IRS or state or local tax authorities of additional corporate income tax liability (and associated interest and penalties) as a consequence of mistakes or inaccuracy of positions discovered in audits.
Due diligence is more essential than ever. The IRS’ increased scrutiny of accounts that are not disclosed in foreign banks and other financial institutions, the expansion of the state bases for the sales tax nexus and the increasing number of jurisdictions that have unclaimed property laws are just some of the concerns that must be taken into consideration when completing an M&A deal. Circular 223 can impose penalties on both the person who signed the agreement as well as the non-signing preparer, if they do not comply with the IRS’s due diligence requirements.