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 and periods, who they apply to, and how to abide by them. The IRS requires taxpayers to use a consistent and standardized accounting approach when reporting income and taxation and Publication 538 serves as a basic guide on how each of them work.

Key Takeaways

  • IRS Publication 538 outlines basic accounting principles for tax reporting by U.S. taxpayers.
  • It covers accounting periods, such as the calendar year and fiscal year, as well as cash accounting and accrual accounting methods.
  • Taxpayers must use a consistent and standardized accounting method to account for and report income, business expenses, and deductions.

Understanding IRS Publication 538

IRS Publication 538 explains some of the rules for accounting periods and standard accounting methods. It provides a basic overview and, in some cases, you may have to refer to other sources for a more in-depth explanation of the topic.

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,

Accounting Periods

Every taxpayer (individuals, business entities, etc.) must figure out their taxable income for an annual accounting period called a tax year. The calendar year—Jan. 1 to Dec. 31—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.

Accounting Methods

Each taxpayer, whether they are an individual, a household, or a corporation, must also 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: 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 them.
  • The accrual method: Under the accrual method, meanwhile, you generally report income in the tax year that you earn it, regardless of when payment is received—and deduct expenses in the tax year you incur them, regardless of when payment is made.

Like the filing schedule, once you choose an accounting method, you will need to follow it consistently and apply for permission from the IRS in order to change the method or basis of accounting.

Once a relevant accounting period and method is chosen, you must abide by it consistently—accounting approaches can only be changed with special permission from the IRS.

Special Considerations

Publication 538 is periodically revised. The latest updates, reflecting new legislation or other fresh developments, can be accessed by visiting: IRS.gov/Pub538.