It used to be that businesses could issue financial statements under the accrual method of accounting, but they could file their income tax returns using the cash basis. The benefit: Companies could pay taxes on income when it was received, rather than when it was recorded.
But, in the past year or so, the Internal Revenue Service has become stricter in granting permission to accrual-basis taxpayers to file their tax returns under the cash method. And now only small service companies are given the go-ahead to convert their books from the accrual to the cash method, although start-ups still can elect cash accounting.
The IRS's position has accountants worried. The service, they fear, may ban cash accounting altogether. And, judging from what IRS commissioner Roscoe L. Egger says (see "Face to Face," page 19), their concerns may be well founded. "If the IRS says we can't change to a cash method, what's to prevent it from saying you shouldn't have been on a cash method in the first place?" asks Tom Ochsenschlager, a partner of Alexander Grant & Co., the accounting firm, in its IRS liaison office. "The camel's nose," he warns, "is under the tent."
Last year, several measures were introduced in Congress that would have allowed companies with annual revenues under a certain level (up to $2 million) to elect the cash receipts and disbursements method of accounting. But these measures never made it to the floor, and chances of resurrection appear slim.