There are no easy answers when it comes to tax filing. Using AI for complex tax returns isn’t a replacement for knowledgeable tax experts.
For many, it’s tempting to turn to artificial intelligence (AI) when it’s time to do taxes—business or personal.
But you’re accepting considerable risk if you choose to rely on AI for this. Tax laws change frequently, and AI tools may not “know” about the most recent regulations. AI also lacks the capability to judge or evaluate at the same level as a human tax professional, so it could make mistakes or fail to address unconventional scenarios correctly. In addition, the IRS says it’s paying close attention to returns being prepared by AI.
When It Comes to Answering Tax Questions, AI Is Wrong Half the Time
The IRS’ independent Taxpayer Advocate Service recently issued a warning to taxpayers and tax advisors who rely on AI to complete tax returns. In this update, a reference is made to a column from The Washington Post. The author posed 16 tax questions to the AI-powered chatbots from two leading tax preparation companies. The responses were incorrect or irrelevant nearly half the time.
And The Washington Post isn’t the only one questioning the use of AI for complex tax questions. Here are a few other examples:
- Can ChatGPT do my taxes? Chatbots won’t replace human expertise any time soon from USA Today
- Can AI Help You Do Your Taxes? From Time Magazine
- 5 ways AI can help you do your taxes – and 10 tax tasks you shouldn’t trust it with from ZDNET
- ‘Proceed with caution’ before tapping AI chatbots to file your tax return, experts warn from CNBC
In the CNBC article, an analysis by Temple University Professor of Statistics, Operations, and Data Science Subodha Kumar reveals that AI can hold its own with basic tax questions but can’t handle prompts for specific and complex tax matters, such as claiming the R&D Tax Credit or the ERC (Employee Retention Credit).
For example, when determining whether an integrator qualifies for the R&D Tax Credit, alliantgroup spends lots of time:
- Talking to employees to learn more about what they do
- Asking how you substantiate each element of the four-part test for each project
- Determining statistical sampling models
- Conducting onsite visits
- Conducting complex legal analysis
Something else to consider: AI only knows what humans have told it. Therefore, its output will only be as good as the data provided to it by people.
The IRS Is Set to Narrow In on Tax Returns Completed with AI
The IRS is obviously well aware of what AI-generated tax returns look like and the types of errors they often include, especially for complex matters like the ERC and the R&D Tax Credit.
For example, potential ERC mistakes may include:
- Overclaiming quarters when eligibility is limited only to certain periods
- Incorrectly assuming eligibility, even if business operations weren’t impacted
- Misidentifying the supply chain disruptions that align with meet IRS requirements
Potential R&D Tax Credit errors could include:
- Incorrect categorization of wages, supplies, or contract research expenses
- Overlooking key elements in the required four-part test
- Using after-the-fact estimates for wage allocations
As a result, it’s also likely that the bureau will focus its audit resources on AI-generated returns.
AI Can’t Replace Informed Tax Professionals
Remember: There are no easy answers when it comes to tax filing. AI can’t replace informed and knowledgeable tax experts who make decisions and determinations for their clients. You may want to ask your tax advisor and preparer what role AI plays in their process, if any, to remove any blind spots.
alliantgroup is an NSCA Business Accelerator that helps integrators determine whether they qualify to receive these lucrative tax savings. Its tax experts and professionals have an extensive understanding of and unique expertise in navigating the various federal and state agencies required to prepare claims and effectively and efficiently manage the process.
