What is Tax Accounting?

Mary McMahon

Tax accounting is an accounting technique used in the United States to organize financial statements for tax purposes. In the US, people are expected to use this technique to handle tax preparation, rather than Generally Accepted Accounting Principles (GAAP), as is the case in many other nations. People who do not follow these procedures can make mistakes on their tax filings that can result in audits and other problems. For companies and people with complex financial situations, tax accounting can become challenging without the assistance of a trained accountant.

An accountant must keep up with the changes in accounting law to serve clients accurately and fairly.
An accountant must keep up with the changes in accounting law to serve clients accurately and fairly.

The standards for tax accounting are set out in the Internal Revenue Code. People can choose between a number of methods for handling their accounts for tax purposes, with the cash method and accrual method being the most popular. Once a method has been selected, the taxpayer must consistently use it. If the method needs to be changed, documentation has to be filed to show why and the change must be approved by tax officials.

Laws pertaining to tax accounting periodically change. An accountant must keep up with changes in the law to serve clients accurately and fairly. Many belong to professional organizations that circulate publications, including updates on the tax code, for the education of members. Others may attend conferences and other events to learn more about changes to the tax code. Software used in tax accounting also updates with changes in the tax law to ensure that people who use tax software are compliant.

The purpose of tax accounting is to create a comprehensive picture of profits and losses within a given tax year so that taxes can be calculated properly. It includes calculating sources of income, making deductions, declaring losses, and all other aspects of preparing financial statements for a tax return. In addition to being used in the preparation of tax returns, tax accounting is also used in long-term financial planning.

Many financial activities, from setting up retirement accounts to buying a home, will have long-term tax repercussions. People may consult accounting professionals before making big decisions so that they can familiarize themselves with the potential impacts of these decisions. A tax accountant can also help people with financial planning and make recommendations so that people avoid unnecessary tax liability and use their resources as efficiently as possible. Tax accountants who offer long-term planning services can also connect their clients with investment advisors and other financial professionals.

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I generally believe that accounting is a good profession to go into, regardless of what specialization you have.

This includes a tax accounting career, except that I have one reservation. If there is a substantial change to our tax code – and there are political appeals to do just that – it makes the job of the tax accountant more difficult.

It may even make that job obsolete, if the government adopts a radical proposal like eliminating the income tax and replacing it with a flat tax.

I don’t think we’re quite ready for that, but it’s safe to say that if you’re a tax accountant, the only constant will be change.

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