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Have AI Do Your Tax Return? Taxpayer Beware

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Byline by Dean Zerbe, Former Senior Counsel to the U.S. Senate Finance Committee; alliantgroup National Managing Director

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When it comes to filing tax returns, Artificial Intelligence (AI) has become the go-to cure-all for some taxpayers – and more concerning – some tax advisors as well. The IRS’ independent Taxpayer Advocate recently came out with a sober caution to taxpayers who are relying on AI (or tax advisors who rely on AI) to do their tax returns.

The Taxpayer Advocate’s statement declares:

Despite efforts to ensure accuracy, these AI assistants may encounter difficulties interpreting complex tax laws correctly or considering unique circumstances that could impact a taxpayer’s return. As a result, taxpayers should not solely rely on AI-generated tax advice.

The Taxpayer Advocate’s statement cites to an informal review by the Washington Post: “Don’t let AI help you do your taxes” March 4, 2024. The Taxpayer Advocate highlights that the Washington Post analysis “ . . . found that two of the leading tax preparation companies’ chatbots provide inaccurate or irrelevant responses up to 50 percent of the time when initially asked 16 complex tax questions.” Yikes.

I see in my work that the problems of AI are especially pronounced with pop-up tax providers looking to assist taxpayers (esp. small and medium businesses) to qualify for highly complex, fact-intensive tax incentives such as the R&D tax credit and the Employee Retention Credit (ERC).

This concern – about the problems of AI and complex tax questions — is reinforced by findings reported by CNBC in an article “Proceed with caution before tapping AI chatbots to file your tax return, experts warn”: referencing analysis by Subodha Kumar, professor of statistics, operations and data science at the Fox School of Business at Temple University. CNBC reported: “Kumar has tested AI chatbots with his students and found the software works for general tax questions, but often provides wrong answers for more specific prompts.”

The simple fact is that in such complex tax matters as R&D and ERC – AI does not have the necessary human judgment.

And as a reminder, AI is only as good as the data provided to it by the humans. For example, I and my colleagues commonly see errors where AI just accepts a taxpayer’s response to whether a project qualifies for R&D – rather than probing and asking how the taxpayer substantiates each element of the four-part test for each project.

There is no question that the IRS – as it determes which taxpayers to audit – is highly aware of these problems of AI-generated tax returns (especially for complex matters such as R&D and ERC). I expect the IRS will be focusing its limited audit resources on AI-generated returns – both the taxpayer and the tax preparer. Fish-meet-barrel. In discussing all this with one of my colleagues, Darren Guillot, a National Director at alliantgroup and formerly Commissioner of Small Business/Self Employed at the IRS, he said: “I want to be clear, you are accepting considerable risks when relying on AI to do an R&D study.“ Eyes open.

While there is certainly a role for AI in tax preparation – especially repeatable tasks with predictable outcomes – AI cannot replace the need for informed and knowledgeable tax experts making determinations on behalf of their client. Taxpayers need to be aware – and ask questions of their tax preparer – of who is doing the actual work of their tax return and what, if any, role AI is playing. Tax advisors need to be similarly aware as to the limits of AI – given that they will be ultimately responsible for their work. Tax advisors will not be able to point to AI/software to excuse or wish away problematic results for their clients. Unfortunately, AI does not provide the easy answers for tax filing – the work still must be done.

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Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform), and the Pension Protection Act. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.