Tax obligations for companies are more than paying tax on income. In the case of M&A, conducting tax due diligence is an essential step in determining the responsibilities and tax obligations are posed by the target company.

Tax due diligence varies dependent on the size and nature of the business being targeted as well as the nature and scope of the transaction. It could include an investigation into foreign reporting forms, prior audits or objections as well as related party transactions. It may also include the examination of local and state taxes (e.g., sales and use taxes property taxes, unclaimed property statutes and misclassification of employees as independent contractors).

While it is easy to focus on the complicated federal tax laws, state and local taxes can be hefty and have significant impact on the financial health harnessing the power of VDRs in competitive business scenarios of a business. Additionally, reputational damage usually occurs when a business is seen as tax evaders, and this can be a difficult thing to recover from.

In the typical situation, when a tax return is being prepared the person who prepared it must sign the return under penalties of perjury stating that it is to the best of his or his knowledge and belief and accurate. A recent ruling suggests the IRS may go above the standard of determining if the preparer used reasonable care when the preparation of a tax returns.