Tax accounting refers to accounting for tax purposes. Universally, there comes up a difference between tax profits and book profits - tax authorities often ask for additional adjustments to book profits and these are captured in "tax accounting".
USA
The Internal Revenue Code governs the application of tax accounting in the United States of America. Section 446 sets the basic rules for tax accounting. Tax accounting under section 446(a) emphasizes consistency for a tax accounting method with references to the applied financial accounting to determine the proper method. So the taxpayer must choose a tax accounting method using their financial accounting method as a reference point.
Types of tax accounting methods
Proper accounting methods are found in section 446(c)(1) to (4) which permits cash, accrual, and other methods approved by the IRS including combinations.
After choosing a tax accounting method, under section 446(b) the Secretary of the Treasury has wide discretion to re-compute the taxable income of the taxpayer by changing the accounting method to be used by the taxpayer in order to clearly reflect the taxpayer's income.
If the taxpayer engages in more than one business then it may use a different method for each business according to section 446(d).
Tax accounting method changes
If the taxpayer wants to change their tax accounting method, section 446(e) requires the taxpayer to acquire the consent of the Secretary of the Treasury. There are two kinds of changes, one where you must receive a letter of approval from the Secretary of the Treasury. Another type of change comes from a series of more routine changes each of which is an automatic change. To get the automatic change the taxpayer must fill out a form and return it to the Secretary of the Treasury.
The taxpayer can adopt another method if the taxpayer files a tax return using that method for two consecutive years. This is different from changing a tax accounting method under the release of the Secretary of the Treasury because in the case of adopting another method the IRS may assess fines and reallocate taxable income. If the taxpayer wants to return to the previous method the taxpayer must ask for permission from the Secretary following the 446(e) procedure.
If the taxpayer fails to request a change of method of accounting then according to section 446(f) the taxpayer does so at their own peril by exposure to penalties.