Tax Law and Accounting Papaer

Tax Law and Accounting

ACC/483 Income Tax Accounting

Joshua Montgomery

5/19/2008

Tax Law and Accounting Paper

There has been some wide controversy within the accounting field between tax law and accounting under the General Accepted Accounting principles, GAAP. The Internal Revenue Service tax code does not always agree with the regulations published by the GAAP. The IRS has published some of its own statutes that govern tax accounting and laws. When studying tax law and how it applies to the accounting field there are many areas that must be addressed. In this paper only three areas will be addressed. This paper will address the modern income tax statutes and their objectives, comparing and contrasting the GAAP and tax accounting, and finally how to differentiate between tax avoidance and tax evasion.

The objectives of modern income tax statutes are to simplify the confusing language used when the tax law was created in 1861, to help pay for the costs of the civil war, as part of the Revenue Act of 1861. Over the years this has led to the creation of the Internal Revenue Code of 1986. Over the current years the code has been amended multiple times to include amendment 26 U.S.C 1. This amendment specifically deals with imposing income tax on the taxable income of individuals, estates and trusts. The sixteenth amendment of the United States Constitution covers the governments ability to tax individuals income. The modern interpretation of this amendment comes from the court case, Commissioner versus Glenshaw Glass Co. Wikipedia.org explains this case in the following terms, “a taxpayer had receives an award of punitive damages from a competitor for antitrust violations, and sought to avoid paying taxes on that award. The court observed that Congress, in imposing the income tax, had defined gross income, under the Internal Revenue Code of 1936, to include:

Gains, profits, and income derived from salaries, wages, or compensation for personal service…of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or other transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.” (Wikipedia.org, 2008)

The plaintiff in this case lost because the court decided that even thought the definition of Gross income has been simplified, but it had no effect on the intention of the statute. Some of the current statutes instituted by the Internal Revenue Service are, Title 31, USC Section 5331, passed in 2001. This statute requires dual reporting of the Internal Revenue Code to both the IRS and the Treasury Department’s Financial Crimes Enforcement Network or FinCEN. Statute, Title 18 USC Section 1960, requires that any money service business must be registered with the federal government. The Bank Secrecy Act or BSA, requires that any monetary transactions that occur between a foreign bank account and a United States bank account over the amount of $10,000 be reported to the authorities for investigation. The current statutes published are on the objective of protecting the Government from tax evasion and those individuals who wish to break the law. (IRS.gov, 2008)

Generally Accepted Accounting Principles and tax accounting do not always coincide on the rules and regulations set by the GAAP and the Internal Revenue Service. According to Paul Miller and Paul Bahnson in their article entitled, Tax accounting doesn’t stack up, they state, “accounting for taxes on the income statement has two goals: to ensure that it looks like they paid their fair share, and that volatile measures and rates of income tax are not revealed.” (2008) They further go on to explain that GAAP for taxes are a bad idea, because of the reports not giving enough information to the agencies involved. So why using the GAAP is easier for accountants to use it is not always the best for companies. Thus the contrasts of both types of accounting regulating authorities.

Tax accounting is governed solely by the Internal Revenue Service. Tax accounting is governed specifically under section 446(a) of the IRS tax code. “Tax accounting under section 446(a) emphasizes consistency for a tax accounting method with references to the applied financial accounting to determine the proper method. So the taxpayer must choose a tax accounting method using their financial accounting method as a reference point.” (wikipedia.org,