The need for harnessing the power of VDRs in competitive business scenarios tax due diligence isn’t always on the top of minds for buyers focused on quality of earnings analysis and other non-tax reviews. However, completing the tax review can help prevent significant historical exposures and contingencies from emerging that could derail the anticipated profit or return of an acquisition as forecasted in financial models.

Tax due diligence is crucial, regardless of whether the company is C or S, an LLC, a partnership or an LLC or C corporation. These entities do not have to pay income tax at the entity level on their income. Instead the net earnings are given to members, partners or S shareholders for individual ownership taxation. Therefore, the tax due diligence effort must include examining whether there is a potential for assessment by the IRS or local or state tax authorities of additional tax liabilities for corporate income (and associated interest and penalties) as a consequence of mistakes or inaccuracy of positions discovered on audit.

Due diligence is more important than ever. More scrutiny by the IRS of foreign bank accounts that are not disclosed and other financial accounts, the expansion of state-based bases for sales tax nexus, changes in accounting practices, and the increasing number of jurisdictions that have unclaimed property statutes are just some of the numerous issues that must be taken into consideration in any M&A transaction. Circular 23 can impose fines on both the preparer who signed the agreement as well as the non-signing preparedr if they fail to comply with the IRS’s due diligence requirements.