What Is IRS Publication 538?

IRS Publication 538 is a document published by the Internal Revenue Service (IRS) that details the various commonly recognized accounting methods. The IRS requires taxpayers to use a consistent and standardized accounting method when reporting income and taxation. All income, regardless of source or type of taxpayer (individual or business), is reported according to a tax year.

The most common accounting methods are cash accounting and accrual accounting. The cash method of accounting has the taxpayer report income in the year that it was received, while the accrual method has the taxpayer report income in the year that income was earned, although it may not be received during that tax year.

Understanding IRS Publication 538

IRS Publication 538 explains some of the rules for accounting periods and standard accounting methods. It is not intended as a guide to general business and tax accounting rules. This publication explains some of the rules for accounting periods and accounting methods. In some cases, you may have to refer to other sources for a more in-depth explanation of the topic.

Every taxpayer (individuals, business entities, etc.) must figure out their taxable income for an annual accounting period called a tax year. The calendar year is the most common tax year, but other tax years may include a fiscal year (FY) and a short tax year. If a calendar year is adopted as the filing year it must continue to be used even if the taxpayer incorporates, enters a partnership or becomes a sole-proprietor. Special permission must be granted by the IRS to change the filing schedule.

Each taxpayer (whether it is an individual, a household, or a corporation) must use a consistent and standardized accounting method, which is a set of rules for determining when to report income and expenses, and how to do so. The most commonly used accounting methods are the cash method and the accrual method.

Under the cash method, you generally report income in the tax year that you receive it, and then deduct expenses in the tax year in which you pay the expenses. Under the accrual method, you generally report income in the tax year that you earn it, regardless of when payment is received. You then deduct expenses in the tax year you incur them, regardless of when payment is made.

The IRS also issues several other informative publications related to tax filing and accounting practices for public consumption, such as IRS Publication 542 and Publication 552,