Tax Due Diligence in M&A Transactions

Tax Due Diligence in M&A Transactions

The need for tax due diligence is not often on the radar of buyers focused on quality of earnings analyses and other non-tax reviews. Tax reviews can help uncover historical risks or contingencies that could impact the forecasted return of a financial model on an acquisition.

Tax due diligence is vital regardless of whether a company is C or S or a partnership, an LLC or a C corporation. They generally don’t pay entity level income taxes on their net income; instead, net income is passed out to members, partners or S shareholders (or at higher levels in a tiered structure) to be taxed on individual ownership. In this way, the tax due diligence effort must include examining whether there is the potential for assessment by the IRS or state or local tax authorities of additional corporate income tax liabilities (and associated penalties and interest) due to mistakes or incorrect positions that are discovered on audit.

Due diligence is more essential than ever. More scrutiny by the IRS of unidentified foreign bank and other financial accounts, the growth of state-based bases for sales tax nexus, the https://allywifismart.com/what-are-the-most-secure-virtual-data-room-solutions-in-the-market/ introduction of changes in accounting methods, as well as an increasing number of states that have laws against unclaimed property, are just some of the numerous issues that must be considered in any M&A transaction. Circular 223 can impose penalties on both the signer of the agreement as well as the non-signing preparer, if they fail to meet the IRS’s due diligence requirements.