The need for tax due diligence is not always on the top of minds for buyers who are focusing on the how earnings analyses are conducted and other non-tax reviews. But conducting a tax review can prevent significant historical risks and contingencies from emerging that could derail the expected profit or return of an acquisition as forecasted in financial models.

Tax due diligence is vital regardless of whether a company is C or S, an LLC, a partnership or a C corporation. The majority of these entities do not have to pay entity level tax on their net income. Instead net income is distributed out to members, partners or S shareholders (or at higher levels in a tiered structure) for individual ownership taxation. Therefore, the tax due diligence approach must include a review of whether there is the potential for a determination by the IRS or local or state tax authorities of an additional corporate income tax liability (and associated interest and penalties) as a consequence of errors or incorrect positions discovered in audits.

The need for a robust due diligence process has never been more vital. The IRS is stepping up its scrutiny of accounts that are not disclosed to foreign banks and other financial institutions, the expansion of the bases used by states for the nexus between sales and tax, and the growing number of jurisdictions that have unclaimed property laws are some of the issues to be considered when completing any https://allywifismart.com/example-of-tax-preparation-due-diligence/ M&A deal. Circular 230 can impose penalties on both the person who signed the agreement and the non-signing preparer, if they fail to meet the IRS’s due diligence requirements.