Shortchanging Due Diligence Today Could Equal a Tall Price to Pay Tomorrow⁄9/14/14+
By: Gabe McCoy
Legal due diligence. These three words often make business owners cringe, reach for their wallets and look for the nearest exit sign.
I recently had a client tell me he was going to buy most of a company’s operating assets, had a gentlemen’s’ agreement with Seller on purchase price, and needed me to “just review my bill of sale Gabe. This deal is very cut and dry so don’t try to complicate it!” Smiling I remarked “Why Steve, I’d never think of doing such a thing.”
So instead of emailing Steve my 25 page M&A due diligence checklist, I decided to ask him a couple questions about Seller’s building lease, capital equipment leases, operating agreement rights of first refusal, revolving line of credit and a few other everyday contracts I knew had to be on Seller’s balance sheet and tucked inside its minute book.
After a few groans, Steve agreed to get me copies of these contracts and other key instruments in Seller’s files. Later that week Steve’s groans turned into sighs of relief because, true to form, almost each contract and instrument contained the customary restrictive language requiring third party prior consents when selling all or substantially all of Seller’s assets.
As my colleague @pmlegalnat always says, the moral of this story is “don’t be penny-wise and pound-foolish.” Spend a few more hours asking for Seller’s third party agreements before closing your acquisition and use an experienced business attorney, not just your CPA or “business consultant,” to perform a couple hours of legal due diligence.
If I pay in full the IRS will just “waive” interest and penalties, right?⁄8/26/13+
This is a question PIERCE / MCCOY hears a lot from clients. Unfortunately, the short answer is simply NO.
However, the longer, more correct answer is that unless you pursue an Offer in Compromise based on doubt as to the collectability of the tax, governed by I.R.C. § 7122, the IRS generally only has discretion to accept full payment of the tax, interest, and penalties in lump sum or over time by installment. Penalties and interest are each handled differently as explained below:
Penalties - a penalty for failure to pay a particular tax would be governed by I.R.C. § 6404(f) permits the IRS. to abate any penalty when it provided erroneous written advice, in response to a written request for advice, and the taxpayer reasonably relied on it. Telephone or in person advice does not qualify, and is almost impossible to prove another way.
Interest - Interest is governed by Pursuant to I.R.C. § 6601, interest generally runs from the time a tax return is due until the time the tax is paid. One exception is an “assessable” penalty, for which case the interest runs from the date the penalty is assessed. Internal Revenue Code § 6404(g) permits the IRS to waive interest, but two circumstances must be present. 1) interest must only be on income tax, so if the interest is on an estate tax, excise tax, or employment tax, there is no authority for the IRS to “waive” interest; and 2) you must demonstrate that the interest was a result of an error or delay on behalf of the IRS in the performance of a “ministerial” act. The liklihood that your circumstances meet both 1 and 2 are rare, therefore, get ready to pay the charged interest.
Without belaboring the point, the IRS will RARELY “waive” a penalty or interest, and the courts do not readily overturn the IRS action.