The need for tax due diligence is not often top of mind for buyers who are focused on the quality of earnings analysis and other non-tax reviews. But conducting a tax review can prevent significant historical exposures and contingencies from emerging that could derail the expected profit or return of an acquisition, as predicted in financial models.

Tax due diligence is vital regardless of whether a corporation is C or S, an LLC, a partnership or a C corporation. These entities don't pay entity-level income taxes on their income. Instead, the net income is distributed to partners, members or S shareholders for individual ownership taxation. This means that the tax due diligence process needs to include reviewing whether there is a potential for a determination by the IRS URL or state or local tax authorities of an additional corporate income tax liabilities (and associated interest and penalties) as a consequence of mistakes or incorrect positions that are discovered on audit.

Due diligence is more critical than ever. The IRS is now under greater scrutiny for undisclosed accounts in foreign banks and financial institutions, the expansion of the state bases for the sales tax nexus and the growing amount of jurisdictions that enforce unclaimed property laws are just a few of the issues to be considered prior to completing any M&A deal. Depending on the circumstances, failure to meet the IRS' due diligence requirements could result in penalties assessments against both the signer and the non-signing preparer under Circular 230.