In general, accounting is a system of recording and summarizing the financial transactions of business entities. As the “language of business,” accounting quantifies a business or organization’s economic activities and shares the information with stakeholders. There are many fields which fall under the umbrella term of accounting, including tax accounting, financial accounting, forensic accounting, management accounting, etc. This article will explore the difference between forensic accounting and tax accounting.
Forensic accounting is a combination of auditing, investigating, and analyzing financial data for use in legal proceedings. Merriam Webster defines forensic as, “suitable to courts of judicature or to public discussion and debate.” Forensic accountants work in anticipation of or actual conflict or litigation. There are two areas of forensic accounting: litigation and investigation.
Forensic Accounting: Litigation
Forensic accounting is used in litigation cases that include dissolution of marriage, breach of contract, shareholder/partner disputes, estate litigation, bankruptcy cases, white collar crimes, and breach of fiduciary duty. Often, forensic accountants give expert testimony in legal proceedings including trials. A forensic accountant can quantify damages sustained by parties involved in existing or pending litigation. In addition, the forensic accountant can testify as an expert witness. This specialized courtroom knowledge differentiates forensic accounting from other forms of accounting.
Forensic Accounting: Investigation
In the investigation realm, forensic accounting examines whether crimes like theft and fraud have occurred. Investigation happens with both civil and criminal matters. In the case of dissolution of marriage, a forensic accountant may be tasked with searching for hidden assets in the case. A forensic accountant is generally hired following suspicion of fraud, theft, or embezzlement.
In contrast, tax accounting is the means used for the preparation of tax returns and other statements for tax compliance. The Internal Revenue Code proscribes the tax laws for individuals and companies in the United States of America. Tax accounting applies to individuals, businesses, corporations, other entities, and even those who are exempt from paying taxes. Tax accounting is intended to track funds. The sole focus of tax accounting is on transactions concerning an entity’s tax burden in relation to accurate tax calculation and the preparation of tax documents. Tax accounting generally falls within three categories: individual, business, and tax-exempt organization.
Tax Accounting: Individuals
A tax accountant is not legally required for an individual. However, it can be helpful when dealing with income, qualifying deductions, investment gains and losses, and donations.
Tax Accounting: Businesses
When it comes to businesses, tax accounting is more complicated. Business tax accounting will delve into the way in which funds are spent and how outgoing funds are distributed. For example, outgoing funds can be directed toward business expenses, shareholders, etc. All aspects of the business tax accounting must comply with Internal Revenue Service (IRS) rules and regulations.
Tax Accounting: Tax-Exempt Organizations
Even when an organization is considered tax-exempt, there are still laws and regulations in place to ensure proper operation of tax-exempt entities. Most of these organizations must file annual returns. The information required includes incoming funds from donations or grants, in addition to how those funds are used for operation of that organization.
In conclusion, while forensic accounting and tax accounting both work with financial transactions, the nuances are great. The modality for which forensic accounting and tax accounting is accomplished vary greatly. When an anticipated or actual controversy is occurring, it is best to find a forensic accountant to investigate further. In the case of tracking incoming and outgoing funds associated with both individuals and businesses, it is best to utilize a tax accountant.