For tax purposes we have been discussing that its okay to have 2 sets of books since GAAP and the IRS do not always agree, I wonder what are the differences and similarities between the 2 books.

Everything should be exactly the same, except for whatever items you need to change to account for tax purposes.

For instance, if you are using straight-line depreciation for a fixed asset on your books, but you're using MACRS for tax purposes, you are going to have a difference in both the expense and the accumulated depreciation each year. You may use $3000 on your books one year, but $6500 for tax purposes. So the expense for tax would be bigger (for that one item only), and therefore net income would be smaller. The accumulated depreciation would be different also, but that will not directly affect current taxes, but can have an effect later if the asset is sold or whatever.

If that were the only difference you had between book and tax, you would only have that one slight difference. Nothing else would be different. But of course, you could have several items like this.

As for the statement that it is "OK" to have 2 sets of books -- yes it is. But you also must think of the cost-benefit. The other way is to make adjustments at the end of the year for the tax differences. Both take time. So you have to determine which is most cost effective. Having always worked for small companies with very few tax adjustments, it was never in a million years worth keeping two sets of books.