Tax obligations for companies are more than simply paying tax on income. In the case of M&A conducting tax due diligence is an essential step in determining what obligations and tax obligations exist for a target company.

Tax due diligence varies depending on the size and nature of the target company, and the scope and nature of the transaction. It could involve an examination of foreign reporting forms, past audits or objections and related party transactions. It could also include the examination of state and local taxes (e.g. sales and use taxes property taxes, unclaimed property statutes and misclassification of employees as independent contractors).

While it’s easy for people to focus on the complexity of Federal tax law, there are state and local taxes that are significant and have an enormous impact on the financial health of a company. The reputation of a company can be damaged if it’s perceived as a tax evader. This can be very difficult to overcome.

In most instances, when a tax return is completed, it is required that the preparer sign the return under penalty of perjury and affirm that the return is truthful and accurate to the best of their knowledge and conviction. However, a recent decision suggests that the IRS might go beyond that norm to determine whether the tax preparer has exercised reasonable diligence while preparing a tax return.

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