Tax accounting is a field of accounting that entails applying the laws and statutes governing the production of tax assets and liabilities in the financial records of a business or individual. These practices are based on the Internal Revenue Code (IRC.) Their primary function is to ensure that the businesses adhere to the standard taxation laws and pay their taxes, as well as to ensure that they avoid infringing on these laws thereby incurring fines or other penalties.
What a tax accountant does
A tax accountant is responsible for review the financial records of their client and ensuring that they produce tax return documents that adhere to the country or state’s laws and regulations. Only tax accountants with a relevant license or certification will be able to approve tax documents and represent their clients before the Internal Revenue Service (IRS.)
A tax accountant’s responsibilities:
- Preparing federal, state and local income taxes
- Preparing tax schedules, quarterly and annual tax reports, payments and other documentation
- Resolve any issues with the company’s tax filing s or policies
- Meeting with clients
- Prepare ledgers
- Liaise with tax agencies
- Calculating and filing taxes
- Projecting and advising the business’ management of known taxes
- Researching and advising management on possible tax breaks and benefits
- Remain updated on any changes to tax laws on any level and apply them when relevent
The different types of taxes
As we all know, taxes are the compulsory contributions that the citizens, residents and businesses are compelled to pay to the government of their state or country. In the US, there are three types of governmental taxes, namely federal, state and local taxes. These taxes are taken as a percentage of their personal income and business profits, or as an added cost to goods and services. Some goods are further taxed to act as a deterrent against their purchase, such as sin taxes of alcohol and cigarettes, or those on imported goods.
These taxes apply to individuals and are usually based on a sliding scale that is determined by their income, net wealth, expenditures and socioeconomic considerations. Some examples include:
This tax is levied on any income generated by an individual or corporation. This is usually based on a sliding scale that is determined by brackets. Different brackets apply based on the type of entity.
These are fixed taxes that are determined by the size and location of the owner’s property. Land, improvement and building taxes all fall under this category. The government’s calculations are either calculated on an annual or once every five years, depending on the jurisdiction.
This is a once-off tax that is imposed on the net value of a property before it is passed on to the previous owner’s heirs.
Similar to the above, it is another tax that is levied from the inheritors of property once the estate has been distributed among all heirs.
These are government mandated taxes that can be shared between parties in that while one party is charged the fee (the consumer) it is imposed by the supplier (such as the retailer or producer.) Examples include:
This is a tax that is charged to the consumer for spending money and is included tin the fee paid to the supplier of the good or service. In many countries, the tax is included in the overall cost given, but in the US, it is added above the overall cost. Therefore, when you are given a price of $1.00 for an item, you will actually pay ~$1.05 for it.
This is a tax that is imposed on the wages and salaries of the employee. They are usually deducted from the employer as shown on their pay slip. Often, the employers will be required to match the amount when they pay it to the government.
A tariff is the tax charged for an exported or imported good. This can either be based on the type of product purchased, such as electronics or cars, or on a product costing above a minimum amount. The purpose in this is to discourage purchasing international products in favor of local products so as to protect local industries and businesses and the overall economy.
Do you need a CPA license to practice tax accounting?
It depends on what type of tax accounting you are doing. If you are only going to prepare taxes, then you do not need a license. However, if you are planning on representing your client before the IRS, you will need a relevant license. Currently there are only two US licenses that allow for an accountant to sign tax documents and represent their clients before the IRS, namely a Certified Public Accountant (CPA) license and an Enrolled Agent (EA) license. The CPA license is granted by a state, while an EA is federally licensed. These are described below.
Types of US tax accounting licenses
A Certified Public Accountant (CPA) is someone who has received state licensure to legally practice public accounting. This entails completing 150 semester hours from a regionally accredited institution, completing that state’s work experience requirements, writing the four-part CPA exam ad fulfilling any ethics exam or citizenship requirements that the state might stipulate.
An Enrolled Agent (EA) is someone who has passed the Special Enrollment Examination and met the other requirements to receive this federal license. It is granted by the US Department of the Treasury and overseen by the IRS. They too are granted unlimited practice rights with regard to taxation. However, they are more limited than CPA license holders in other regards.
The differences between tax accounting vs financial accounting
|Tax accounting||Financial accounting|
|Requires a degree and licensure to practice fully||Usually requires at least a degree|
|Financial information is presented and recorded according to state and federal legislature||Financial information is presented and recorded according to GAAP principles|
|Reports are used to track actual cash receipts and payments, as well as possible deductions, to determine how much tax is owed, as well as calculating tax returns||Reports are used for advising customers and management regarding future financial decisions|
|Focuses on keeping track of all income and expenditures that would influence the monies owed to federal and state governments||Focuses on keeping accurately recording and presenting all financial information of the business in a concise, accurate and legible manner|
The similarities between tax accounting vs financial accounting
- Both legally mandatory
- Both take use of actual financial data
- Documents and reports are usually reported at the end of an accounting period
- Entails compiling standard set of reports
Why be a tax accountant?
As a warning, most accountants dislike tax accounting or are ambivalent about it – largely due to the hours and pressure incurred over tax season, as well as the repetitiveness of much of the tasks. However, as with most jobs, the tedious tasks are usually left to the lower level-employees. So, once you work your way up, the work will become more interesting.
Tax work can be rewarding, as much of tax has to do with trying to save your client’s money by finding tax deductible expenditures, claimable items for tax return applications and other methods. Accomplishing this takes much out-of-the box thinking, brainstorming and pouring through legal legislation to find ways to help your clients. You will also therefore need to liaise with legal teams, management, the IRS and other relevant parties when need be. The most tedious part for many is keeping up to date with any changes to tax laws and procedures on all levels.
A good way to tell whether this is something that you would like to pursue is by trying to get an internship position in a public accounting firm where you would be assisting in tax preparation. After all although taxation is a set course in most college accounting curriculum, there is a vast difference between theoretical application and actual practice.