Buyers are often more concerned about the quality of earnings analysis and other non-tax reviews. But conducting a tax review can prevent significant historical risks and contingencies from emerging that could derail the expected return or profit of an acquisition as forecasted in financial models.

Whether a company is one of the C or S corporation, or an LLC or partnership, the necessity of conducting tax due diligence is important. These entities do not have to pay entity-level income taxes on their income. Instead the net earnings are given to members, partners or S shareholders for individual ownership taxation. Due diligence should include a review of the possibility of being assessed of additional corporate income taxes by the IRS or other local or state tax authorities (and the associated penalties and interest), as a result of mistakes or incorrect positions discovered on audit.

The need for a thorough due diligence process has never been more crucial. Increased scrutiny by the IRS of unidentified foreign bank and other financial accounts, the expansion of state bases for https://allywifismart.com/dropbox-virtual-data-room-review/ sales tax nexus, changes in accounting methods, and an increasing number of states that have unclaimed property statutes are just a few of many issues that must be considered in any M&A transaction. Depending on the circumstances failure to meet the IRS due diligence requirements could result in penalty assessments against both the signer and non-signing preparer under Circular 230.