Tax Law in Accounting

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Table of Contents

Introduction
Analysis and Discussion
Conclusion
References

Introduction

This paper seeks to define the objectives of modern income tax statutes, compare and contrast Generally Accepted Accounting Principles (GAAP) and tax accounting. The paper also explains the reasons for the difference between the two. In addition, the paper will differentiate between tax avoidance and tax evasion. The last part makes a conclusion from the discussions made.

Analysis and Discussion

The objectives of modern income tax statutes

The objectives of modern income tax statutes primarily include raising tax revenues to defray expenses of government (Crane, 2006). There is no government in this world that would survive without taxes. Hence taxes are considered as the lifeblood of the government (Dimaampao, 2002).

To attain its objectives, the government must be able to have a framework or standard to measure revenues and expenses as done in financial accounting. However the standards as far as taxation is concerned, are not exactly the same as those accomplished under financial accounting. The next section will speak more about the distinctions of the two terms.

Another purpose of modern income tax statutes is for regulation. Income taxation applies the principle of progressive taxation which means that those who have more income will have to share more by paying higher taxes. Thus, it is not surprising to see that the higher the income of the individual the higher would be share in taxes. The income tax therefore would promote in the distribution of wealth to society since than those who have less would benefit as a result from the higher taxes paid by those who earn more income.

Since income could explain the growth of wealth among all kinds of entities, it could be deduced that those who have increased wealth must have paid more taxes. Since wealth could also be measured my monetary currency, it is indispensable that there could be tax accounting for purposes of computing the tax liabilities of individuals and business entities. Moreover, since income taxation is made to distribute wealth, it essentially promotes equality of opportunities for all which is in consonance with the objectives of the US Constitution.

As a regulatory measure, income taxes could be used by the government to influence consumer spending, depending on how the government evaluates what is happening on the economy. To illustrate, because of the present downturn in the economy, the Obama government may include in its plan the use tax cuts as a way of motivating people to spend because of higher disposal income caused by reduced tax rates. The reduction in tax rates could therefore help in restoring the economic activities that are badly needed not only by the US economy but the whole world as many are depending from it.

As regulatory measure, the income tax is also use to balance a sense of inequality or injustice that is created by state property taxes and federal tariffs and excises (Crane, 2006).

Compare and contrast Generally Accepted Accounting Principles (GAAP) and tax accounting. Explain why they are different

The GAAP encompasses the standards used in the preparation of financial statements under financial accounting under the standards (Meigs and Meigs, 1995). On other hand, under tax accounting standards include the taxation laws passed by the US legislative bodies particularly the US Congress and those laws and regulations as implemented by the Internal Revenue Service (IRS). There is similarity under financial accounting which uses GAAP and tax accounting which uses tax laws, rules and regulations. Both would cause the production of the income statement and balance sheet. The income statements measures the revenues and expenses while the balance sheet measures the financial position of an individual or a business entity in terms of assets, liabilities and owner’s equity.

But since the bases or standards from which the two financial statements are prepared, the results would be different to a great extent. Revenues reported under financial accounting would be different under tax accounting in many cases. This could be caused by the fact that under financial accounting, the usual accounting method is accrual accounting while under tax accounting there are cases where the cash accounting method is used.

Similarly, difference in net income between financial accounting and tax accounting could be caused by the treatment of expenses. Some expenses which are deduction to revenues may be part of the financial accounting like the doubtful accounts expense (Meigs and Meigs, 1995) but the same may not be allowed by the tax rules unless the accounts could no longer be collected by the taxpayer by stronger kind of evidence than mere estimate.

The difference is essentially caused by the distinct purpose of each. While financial accounting aims to provide information for various users of financial statements, tax accounting basically serves government users such the Internal Revenue Service (IRS), the US Congress and others for purposes as described earlier.

Differentiate between tax avoidance and tax evasion

Tax avoidance is legal and is allowed by law by the application of knowledge of the different options as allowed by the tax laws and regulations to minimize the payment of taxes. Tax evasion on the other hand is illegal since it is a deliberate non-payment of correct taxes which may be caused by deliberately by not filing of the required income tax returns or deliberately misstating the correct amount of revenues or expenses to compute income as required by law. The tendency therefore if there is attempt to commit tax evasion is by misstatement in terms of understating the reported revenues and overstating of reported expenses. To practice tax avoidance, one must be familiar with tax laws and different valid options that would be availed legally. Tax avoidance may not need familiarity of tax laws as it is enough that there is deliberate intention not to pay taxes or to commit fraud in meeting tax obligations to the government.

Conclusion

This paper has defined the objectives of modern income tax statutes which laid the ground in comparing and contrasting GAAP and tax accounting. The objectives of tax accounting is essentially different from financial accounting that uses GAAP but understanding financial accounting appears to provide a good foundation in understanding tax accounting. It is not big surprise to see that those who are practicing tax accounting are necessarily accountants who have backgrounds in accounting. The reasons for the difference between the two concepts therefore emanated from the difference of their objectives or purposes. The similarities and distinctions of the two could not be further detached from the discussion of the difference between tax avoidance and tax evasion.

Since the accountants practicing tax accounting are expected to know other areas of accounting including its intricacies and complexities, it is not also surprising that the accountants are best people to understand the effective implementation of taxations laws. On the other hand, thus if accountants are true to their profession they could really help prevent evasion and help their clients to resort to tax avoidance. In certain cases however, some of those who may commit or help commit tax evasion may include the accountants who happen to know more about accounting.

References

Crane, Charlotte (2006) The Income Tax and The Burden of Perfection, Northwestern University Law Review, Vol. 100, No. 1

Meigs and Meigs (1995) Financial Accounting, McGraw-Hill, New York, USA.

Dimaampao, Japar (2002) Tax Principles and Remedies, Rex Bookstore, Inc.

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