Tax Law and Accounting Paper

1293 Words Jul 1st, 2010 6 Pages
Tax Law and Accounting Paper In today’s financial world, preparation and reporting of income taxes has become one among the other main reasons why individuals and businesses are keeping and maintain their financial records. However, there has been some controversy between tax laws and accounting under the General Accepted Accounting Principles (GAAP). Simply because IRS is not always agrees with GAAP’s principles and thus creates its own tax laws. This paper will discuss the objectives of modern income tax statutes, compare and contrast the GAAS and tax accounting, and differentiate between tax avoidance and tax evasion.
Objectives of Modern Income Tax Statutes The primary objective of the modern income tax statutes was to amend the
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GAAP vs. Tax Accounting Generally Accepted Accounting Principles (GAAP) is a set of rules created by the Financial Accounting Standards Board (FASB) which are used to prepare company’s financial statements for reporting purposes. The GAAP simply provide guidance to financial statements preparers on how to account for various types of transactions (Ruppel, 2004, p. 2). While the tax accounting is mainly concerned with preparing statements and reports that are in compliance with the IRS tax laws. According to Plesko (2004), one of the differences between GAAP and tax accounting is that from a tax administration perspective, the book income under the GAAP accounting provides a separate measure of the income and expense items that can be compared to the values reported on the tax return (p.5). This mainly results because the GAAP allows any method for income recognition, but IRS uses the cash basis for tax returns. Other differences are the depreciation methods used for asset depreciation. The GAAP typically allows straight line or other acceptable methods, while the Tax Accounting prefers using the MACRS method (White, 2008, p.1). Another difference includes the interest revenue recognition. Under the GAAP accounting interest revenue is recognized when earned, but under the Tax Accounting the municipal interest income is exempt for tax purposes.
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