Question

As a new CPA, you always need to consider the financial accounting implications of proposed tax transactions when you are advising your clients. A transaction in the accounting mainstream may be treated or have a different objective or orientation in the tax environment. The focus on Tax accounting is the Internal Revenue Service. Hence, we focus on calculating, reporting, and predicting one’s tax liability according to legal principles (rules), while considering ethics. Financial accounting is oriented primarily to external stakeholders. Hence, we use GAAP. Your text identifies six steps in the Tax Research Process. One of the steps is to determine the facts in the situation and identify the issues? How will these two steps differ from using the GAAP process in fact-finding?

Answer 1

Tax research may be
defined as the process used to ascertain the optimal answer to a question with tax
implications. The six steps in Tax research process are:-

1. "Get the Facts" :Abstracting out the facts of the case or any event.

2." Identify the Issues":After getting all the facts from the case, identify the key issues in the case.

3." Locate the Authority" responsible

4. 'Analyze Authority" to find material facts

5. "Repeat steps through Step 4" to find further unfolded material facts

6. "Documentation of research work and communication of conclusions"

GAAP stands for generally accepted accounting principles. It’s a set of standardised procedures and principles issued by the Financial Accounting Standards Board (FASB) that aims to improve the consistency, clarity, and comparability of financial information.

This makes it easier for investors to analyze and extract useful information from the company's financial statements, including trend data over a period of time. It also facilitates the comparison of financial information across different companies.

So to conclude,

1.Method of finding facts

Tax research process find facts of each case on "inquiry with clients" and identity issues.In tax reasearch process, fact research can be closed fact research or open/controlled-fact research. If the research relates to a problem with transactions that are complete, it is referred to as closed-fact research and normally falls within the realm of tax practice known as tax compliance. On the other hand, if the research relates to contemplated transactions, it is called controlled- or open-fact research and is an integral part of tax planning.

In researching a closed-fact problem, the first step is gathering all of the facts.
Unfortunately, it is difficult to obtain all relevant facts upon first inquiry. After the general area of
the problem is identified and research has begun, it usually becomes apparent that more
facts must be obtained before an answer can be derived. Consequently, additional
inquiries must be made until all facts necessary for a solution are acquired.

But in GAAP, facts of the case are found by reading and "analysing financial statements". GAAP provides a standardized set of rules to prepare these financial statements. Stakeholders can analyse financial statements to extract facts or information and identity issues.

2.Kind of facts

In Tax Research Process, only facts related to tax compliance and tax planning are considered.

In GAAP, facts related to tax compliance, legal compliance, accounting statndards compliance etc.... are considered.