Buyers are usually more concerned about the quality of earnings analysis and other non-tax reviews. Tax reviews can help discover historical exposures or contingencies that could impact the forecasted return of a financial model on an acquisition.
It doesn’t matter if the company is an C or S corporation, or an LLC or a partnership, the necessity of conducting tax due diligence is crucial. These 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. As a result, the tax due diligence focus needs to include reviewing whether there is a potential for a determination by the IRS or local or state tax authorities of an additional tax liabilities for corporate income (and associated interest and penalties) as a consequence of mistakes or incorrect positions that are discovered on audit.
The need for a thorough due diligence process has never been more crucial. The IRS is stepping up its scrutiny of accounts that aren’t disclosed in foreign banks and financial institutions, the expanding of the bases used by states for the sales tax nexus as well as the increasing number of jurisdictions that impose unclaimed property laws are some of the factors that need to be considered when completing any M&A deal. Circular 223 can impose penalties on both the person who signed the agreement and the non-signing preparation company if they fail to comply with the IRS’s due diligence requirements.