The Feasibility of a GAAP-Based Income Tax System

In 2005, the President's Advisory Panel on Federal Tax Reform recommended that future studies address the feasibility of a tax system based on GAAP. A theoretical underpinning is presented for the proposition that an income statement, based on GAAP, could serve as a tax return. The costs of tax and accounting compliance would be reduced significantly. With a GAAP-based tax system, the number and/or extent of audits could be reduced, thereby reducing audit costs for taxpayers and the government. Under the current two-part arrangement, well educated, intelligent professionals are necessary to comply with both GAAP and tax. A GAAP-based tax system would free up some of these individuals to serve society in other ways. A GAAP-based tax system would eliminate numerous tax incentives built into the current tax system. Lower compliance costs and lower tax rates would increase the competitiveness of American companies in the global economy. According to some, by shifting to a GAAP-based tax system, GAAP would replace IRC. In the process, the FASB and other accounting standard setting bodies would replace Congress as the body that determines tax policy. The authors question the premise that the objectives of financial accounting and tax are so inconsistent as to require the preparation of two documents.