what is tax accounting 
tax accounting is a structure of accounting methods focused on taxes rather than the appearance of public financial statements in short tax accounting is the means of accounting for tax purposes tax accounting is governed by the internal revenue code which dictates the specific rules that companies and individuals must follow when preparing their tax returns tax accounting applies to everyone individuals businesses corporations and other entities even those who are exempt from paying taxes must participate in tax accounting the purpose of tax accounting is to be able to track funds funds coming in as well as funds going out associated with individuals and entities tax accounting principles vs financial accounting gaap in the united states there are two sets of principles that are used when it comes to accounting the first is tax accounting principles and the second is financial accounting or generally accepted accounting principles gaap under gaap companies must follow a common set of accounting principles standards and procedures when they compile their financial statements by accounting for any and all financial transactions 1 balance sheet items can be accounted for differently when preparing financial statements and tax payables for example companies can prepare their financial statements implementing the first in first out fifo method to record their inventory for financial purposes yet they can implement the last in first out lifo approach for tax purposes the latter procedure reduces the current year s taxes payable 2while accounting encompasses all financial transactions to some degree tax accounting focuses solely on those transactions that affect an entity s tax burden and how those items relate to proper tax calculation and tax document preparation tax accounting is regulated by the internal revenue service irs to ensure that all associated tax laws are adhered to by tax accounting professionals and individual taxpayers 3 the irs also requires the use of specific documents and forms to properly submit tax information as required by law hiring a professional tax accountant is optional for an individual but often necessary for a corporation as business taxes are more complicated than personal taxes types of tax accountingfor an individual taxpayer tax accounting focuses solely on items such as income qualifying deductions investment gains or losses and other transactions that affect the individual s tax burden 4 this limits the amount of information that is necessary for an individual to manage an annual tax return and while a tax accountant can be used by an individual it is not a legal requirement meanwhile general accounting would involve the tracking of all funds coming in and out of the persons possession regardless of the purpose including personal expenses that have no tax implications from a business perspective more information must be analyzed as part of the tax accounting process while the company s earnings or incoming funds must be tracked just as they are for the individual there is an additional level of complexity regarding any outgoing funds directed towards certain business obligations this can include funds directed towards specific business expenses as well as funds directed towards shareholders 5while it is also not required that a business use a tax accountant to perform these duties it is fairly common in larger organizations due to the complexity of the records involved even legally tax exempt organizations use tax accounting as they are required to file annual returns even in instances where an organization is tax exempt tax accounting is necessary this is due to the fact that most organizations must file annual returns 6 they must provide information regarding any incoming funds such as grants or donations as well as how the funds are used during the organization s operation this helps ensure that the organization adheres to all laws and regulations governing the proper operation of a tax exempt entity 