How to Build a Bridge: Eliminating the Book-Tax Accounting Gap
Accounting is no longer a way to provide an accurate and unified view of a company's finances. Instead, it has become a means to an end. For the public books, the goal is to achieve smooth and steady earnings growth that will lift the value of the company's stock .... For the IRS, the goal is the exact opposite-keeping income, and thus taxes, to a minimum. In 1999, Treasury released data indicating a rise in book-tax differences in the late 1990s, which it interpreted as evidence of increased tax shelter activity.' Although the latter contention remains unproven, the implications of the data are clear. Whether corporations are engaging in abusive tax shelters or simply taking advantage of deliberate disparities between the tax and financial accounting systems, there has been increased "demand for tax-favored investing and financing activities, specific factors that generate timing and permanent differences between financial and taxable income, and factors that may create noise in the estimation of financial and taxable income." Since that 1999 report, a deluge of financial scandals has drawn increased public and governmental attention to the accounting methods used by U.S. corporations and their professional advisers. Corporations in the United States produce two sets of accounts each year. The financial statements given to investors and the public are prepared according to Generally Accepted Accounting Principles (GAAP), which include guidelines established by the private sector Financial Accounting Standards Board (FASB) and governed by the Securities and Exchange Commission (SEC). Tax law appears to base income reporting on financial reporting: "Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books." In fact, however, the starting point for taxable income is vague. There is no requirement that the books used to calculate taxable income be the same as those used to produce the financial statements. A corporation may use different accounting methods for items within the same business, may combine cash and accrual methods, and may use different methods for different trades or businesses