Buyers are typically more concerned with the quality of earnings analysis and other non-tax reviews. But completing a tax review could prevent substantial past exposures and contingencies from emerging that could derail the anticipated profit or return of an acquisition forecasted in financial models.

It doesn't matter if the company is one of the C or S corporation, or a partnership or an LLC, the necessity of conducting tax due diligence is important. The majority of these entities do not have to pay entity level income taxes on their net income; instead net income is distributed out to members or partners or S shareholders (or at higher levels in a tiered structure) to be taxed on individual ownership. As a result, the tax due diligence approach must include a review of whether there is a possibility for assessment by the IRS or local or state tax authorities of additional tax liability for corporate income (and associated interest and penalties) due to errors or incorrect positions discovered in audits.

The need for a robust due diligence process has never been more critical. The IRS is stepping up its scrutiny of accounts that are not disclosed in foreign banks and other financial institutions, the expanding of the state base for the sales tax nexus, and the growing amount of jurisdictions that enforce unclaimed property laws are a few of the issues that must be taken into consideration when completing an M&A deal. Circular 230 can impose penalties on both the preparer who signed the agreement as well as the non-signing preparer, if they fail to meet the IRS's due diligence requirements.