Tax Law & Accounting - Research Paper Example

Tax law and accounting under GAAP are facing wide controversy as to their functions to the society nowadays. The ratifications of earlier tax laws have created the modern tax statutes with additional objectives. The main objective is to simplify the rulings of previous tax laws with a purpose that supporting government operations will remain. However, the emerging of additional objectives that deals with the unfair imposition of income tax, and specialized economic objectives have made the structure of modern tax laws complicated. Many have expressed amazement and frustration with regard to the substantial complexity of tax laws, particularly in the ambiguity of tax requirements to the taxpayer. Instead of creating a comprehensive system for people to be honest in their tax liability, the system has provided the people/entities an excuse not to be honest. Introduction Tax is considered as an enforced contribution to the government which can be direct or indirect. Those taxes that are imposed to individuals with income and to legal entities like corporations are called direct tax while those that are financially charged through commodities are known as indirect tax. Taxes derived from income are determined through different effective rates which are imposed to all constituents throughout the world by subnational entities such as federal, state, and local governments. Based on the United States Constitution, the “power to lay and collect taxes, duties, imposts, and exercises, to pay the debts and provide the common defenses and general welfare of the United States” is vested to the Congress (“United States Constitution,” n.d.). Furthermore, tax statutes are created to make certain that U.S. tax setting and features will be in uniformed with other jurisdictions, and inequalities of tax burden will be avoided. The history of the U.S. tax system has marked significant changes just to make the system fairer, simpler, and more consistent to all American taxpayers. This is also to further restrict the old yet growing tax evasion and tax avoidance strategies. These problems have pushed the idea that tax statutes should be construed strictly such as the passage of the 16th Amendment in 1913 and the Tax Reform Act of 1986 (Webley et al., 1991, p. 135). These ratifications are the forerunners of modern income tax statutes which are said to be complicated and economically harmful to individuals and businesses (“Fact Sheets: Taxes,” n.d.). This paper will address the objectives of modern income tax statutes, comparing and contrasting the GAAP and tax accounting, and finally how to differentiate between tax avoidance and tax evasion. Objectives of Modern Income Tax Statutes U.S. tax system is said to be fairly well-defined when taxation of income has been modified. By using the ability tax theory, the government has given its constituents a practicable taxation system. However, modern income tax statutes enacted in 1913 appeared so highly complicated that cannot be understood by all taxpayers (Wilson, n.d.). According to Witte (1985), “the original modern income tax statutes passed in 1913 was a combination of earlier federal laws, state statutes, and the Britis income tax” (p. 246). Indeed, the scope has been broader and the degree of tax rates has increased wherein many have commented that this is the worst kind of tax. Many have asked if the objectives of imposing higher tax rates to low-income individuals and small business, reduction of exemptions, and continuing federal income tax, stipulated in modern tax laws are still constitutional. The government justified the scenario and said that there is no difference between modern tax laws and the earlier laws, because the former are seeking for the same objectives, and this is to raise government revenue to finance operations (Herrmann, 2002, p. 19). Despite of such argument, the economic objectives of modern laws are economically harmful not just to the employment of individuals but also to business operations. According to Webley et al. (1991, p. 138) and Daunton (2001, p. 202), modern income tax statutes appeared to create a complicated economy that is burdensome to taxpayer because the tax requirements are uncertain. This ambiguity might result to a more serious problem, for instance, giving dishonest tax payers convenient excuses for incurring such criminal actions even though the action is very well planned. Although the objectives of modern income tax statutes are for the people’s benefits, there is still a need for the government to look and consider the harmful effects it might caused to the people’s majority. GAAP and Tax Accounting Generally Accepted Accounting Principles and Tax Accounting are accounting methods used for business and personal needs. These two methods are different in various ways such as in terms of reporting, recording, and accounting techniques that are being used. In terms of the nature of reporting, financial documents based on GAAP are intended for several conforming financial institutions that will examine the validity of the report, and to broader stakeholders of the organization. Likewise, tax accounting is applicable to do financial reports; however, the results are in conformity with the taxing authorities. GAAP is usually the choice of inexperienced entrepreneurs because the method contained realistic financial data and the reports are consistent whereas tax accounting is applicable only to establish businesses that preferred to report monetary operations reliably. In terms of recording, GAAP is very much particular in tracking all monetary reality of daily operations such as in the recording of bad debts. Under GAAP, bad debts are not directly declared as noncollectable because a provision is given to the customer to pay its obligation. If the debtor will be able to pay or will become insolvent after the year ended, adjustments will be recorded in the next accounting period. On the other hand, tax accounting is using the direct write-off method wherein there is no more settlement in noncollectable because it will be directly entry as bad debt expense. However, this method is solely designed for tax purposes and not for business financial operations. Another issue between GAAP and tax accounting is the usage of accounting techniques/methods. U.S. GAAP is using accrual accounting methods while tax accounting is known as cash basis (Meek, 2004, p. 184; Wild, 2005, p. 375). Accrual-based would only report item of revenue which are already earned by the company, while tax accounting includes business item by the time it is earned and paid. Tax Avoidance and Tax Evasion Tax avoidance and tax evasion are strategies of reducing tax liability which are different primary in terms of legality. Tax avoidance or also known as tax mitigation is a lawful conduct of minimizing tax liability by not disclosing all the material information needed to assess the tax rate of an individual or entity to the tax authorities. This is not considered as a criminal act but only a dodging of one’s duty as a taxpayer because it does not cause harmful effects to government activities. By contrast, tax evasion is considered to be illegal, a criminal violation which is punishable by law (Weeghel, 1998, p. 35). This strategy is not just a simple manipulation of information to avoid paying tax, rather it is a case of under-declaring or overstating asset/income or dishonest tax reporting which is not authorized by law (Rath, 2008, p. 269). These strategies are one of the reasons why tax statutes are construed strictly by the government to its constituents. Conclusion The objectives of modern tax statues are said to be the same with the earlier tax laws. To support government operations particularly in paying debts, and in generating revenue for economic and social situations are the primary objectives in modern tax statutes. However, it appears that additional objectives make the system highly complicated and uncertain to taxpayers’ obligation. Individuals and entities have two choices in reporting financial conditions, and these two methods are having significant differences in terms of reporting, recording, and techniques recognition. Tax statutes are the primary defense against tax avoidance and tax evasion. In terms of legality, tax avoidance is considered to be one but tax evasion is illegal. References Daunton, M. (2001). Trusting Leviathan: the politics of taxation in Britain, 1799-1914. New York, NY: Cambridge University Press. Herrmann, D. V. (2002). The big gamble: the politics of lottery and casino expansion. Westport, CT: Greenwood Publishing Group. Meek, G. K. (2004). Developments in country studies in international accounting: Americas and the far east, Vol. 3. California: Edward Elgar Publishing. Rath, S. (2008). Tax evasion and trust schemes. In F. Shanty & P. P. Mishra (Eds.), Organized crime: from trafficking to terrorism (pp. 269 - 270). California: ABC-CLIO, Inc. Fact Sheets: Taxes. (n.d.). United States Department of the Treasury. Retrieved from https://ustreas.gov/education/fact-sheets/taxes/ustax.shtml United States Constitution. (n.d.). Cornell University Law School. Retrieved from http://topics.law.cornell.edu/constitution/articlei Webley, P., Robben, H., Elffers, H., Hessing, D., & Cowell, F. (1991). Tax evasion: An experimental approach. UK: Cambridge University Press. Weeghel, S. (1998). The improper use of tax treaties: With particular references to the Netherland and the United States. United Kingdom: Kluwer Law International Ltd. Wild, J. J. (2005). Financial accounting: Information for decisions. New York, NY: McGraw-Hill. Wilson, R. A. (n.d.) Personal exemptions and individual income tax rates, 1913-2002. IRS.gov. Retrieved from http://www.irs.gov/pub/irs-soi/02inpetr.pdf Witte, J. F. (1985). The politics and development of the federal income tax. Madison, Wisconsin: The University of Wisconsin Press. Read More