Nobody likes tax season. Individuals and business owners dread the idea of facing a large tax bill, and let's face it, accountants don't really like it either.
Although the extra income is nice, of course, tax season is the most stressful time of year for accountants, filled with monotonous, repetitive and headache-inducing work that forces them to work thanklessly long hours.
However, what if there were a tool that allowed accountants to reap the financial rewards of the busy tax season while reducing the stress and frustration that historically comes along with it? That is precisely what artificial intelligence technology promises to offer. But is this promise too good to be true?
On paper, it may seem like the accounting profession is one of the more natural candidates for automation by artificial intelligence. After all, accounting is full of data and calculations, which is the bread and butter of AI technology. Yet, many outside the profession do not realize the amount of nuance involved in accounting. It's not just about crunching numbers; it's also about interpreting codes and finding loopholes with critical thinking and precise strategy to help clients yield the best possible financial outcome.
There's also the fact that accounting is one of the most sensitive fields there is when it comes to data. The data that accountants work with is private, valuable financial information, the release of which could have catastrophic consequences for clients (and therefore for the financial professionals who work with them). Because of this, the use of artificial intelligence in accounting raises all sorts of ethical and security questions that are not easily answered.
One area in which potential use cases for artificial intelligence in accounting have been particularly explored is tax preparation. Tax season is one of the most labor-intensive, monotonous processes in the accounting profession, but it is also one of the most important and one of the most important to get right. Even one slight mistake during filing could have drastic legal and financial consequences.
Those in the tax services industry have likely heard of a variety of artificial intelligence tools that can be used to help during the tax filing process. Some of these, such as Intuit Assist, the "generative AI-powered financial assistant" from the company behind TurboTax, are consumer-facing products that use artificial intelligence to bypass the role of human tax service professionals. Others are tools that work as "assistants" for AI companies, helping them to streamline some of the more monotonous and laborious tasks of tax season.
When and when not to use artificial intelligence in tax season
Still, it's important to note that, as in any discipline, artificial intelligence technology in the tax industry has its limitations and strengths. While this technology is suitable for some tasks and use cases, there are other applications that are simply too risky, whether from an economic or security standpoint.
Some of the things that artificial intelligence can do well include:
- Sort data: One of the most exciting use cases for artificial intelligence for tax professionals is using AI programs to sort data. AI models can be trained to do things like read W-2s, 1099s, receipts, bank statements and other financial records, allowing this data to be quickly mapped into relevant tax forms. With this technology, tax professionals can streamline one of the most time-intensive aspects of the filing process.
- Error detection: Artificial intelligence can be used to aid tax professionals in error detection by identifying any anomalies in paperwork before it is filed. This approach to using AI can be particularly beneficial for tax professionals working with clients who prepare their own returns before submitting them to the professional preparer for review and filing.
- Explanations of tax terms: Another thing that artificial intelligence is great at doing is explaining unknown concepts and terms. Of course, this is not a use case that tax professionals will use directly, but it could be a beneficial offering for clients. By giving clients a tool to help them understand complex concepts and terms, tax professionals can spend less time explaining things and spend more time developing a strategy.
On the other hand, some of the biggest weaknesses and shortcomings of artificial intelligence are:
- Makes bad assumptions: The limitation that defines all artificial intelligence technology is that AI is only as good as the information it is given. If an AI program being used to prepare taxes is fed bad information, there's a high likelihood that it will make bad assumptions. Conversely, a human preparer can often identify when information is bad and request additional or amended information.
- Does not assess audit risk: One of the biggest shortcomings of artificial intelligence as a tax preparation tool is that, at this time, AI does not have the ability to successfully assess audit risk. Although AI is great at analyzing patterns, it cannot understand context, and audit risk is all about context, which is why a human element is still necessary in the tax process.
- Does not take accountability: Finally, artificial intelligence does not take accountability if anything goes wrong. There are
legal structures in place to hold tax preparers accountable for mistakes if the client was acting in good faith. Were a client to use artificial intelligence to prepare their taxes, they would have none of these protections in place and could be held liable.
What artificial intelligence means for tax firms and small businesses
The people who will feel the greatest impact of AI being integrated with tax preparation are both small, independent tax services firms and small businesses, for whom high-quality tax services may have previously been out of reach. Smaller tax firms will become more competitive despite having fewer resources, while the increased capacity and improved efficiency of tax professionals could help lower prices.
One of the biggest questions that small business owners and tax professionals alike have is whether an AI can file a tax return by itself. If this functionality were to happen, the implications could be massive. For small businesses, using AI to complete tax returns could lead to cost savings. For tax professionals, the use of AI to complete tax returns could improve efficiency and allow human accountants to focus on other, more laborious tasks such as tax planning.
As is often the case with many applications of artificial intelligence, the simpler the use case, the more likely the AI is to be successful. If an individual is filing a simple tax return with a single W-2 and no dependencies or additional income, artificial intelligence may be able to get the job done by itself. However, when you start adding additional factors like crypto or stock sales, self-employment, and rental property, it becomes much less feasible.
The truth is that artificial intelligence technology is simply not yet at a point where it can autonomously complete and file tax returns. For one, there are several logistical obstacles that would prevent AI from being used for this purpose. The IRS does not allow an artificial intelligence program to sign a return as a paid preparer, and an AI cannot represent clients to the IRS. These limitations could present a challenge to businesses, particularly if a mistake is made.
And speaking of mistakes, AI
The future of the tax services industry post-AI
From the point of view of the tax industry, one of the biggest questions that remains about the AI revolution is whether artificial intelligence will replace human accountants. The truth ultimately lies somewhere between yes and no.
It's inevitable that the use of AI will replace some employees in the industry. Those in data entry roles and low-skill seasonal prep workers are at the most risk of having their positions become redundant or automated by artificial intelligence, as these menial tasks are the types of functions that AI tends to consistently excel at.
That being said, there is certainly still a need for human accountants, especially in high-level positions that involve strategic thinking and decision-making. One of the biggest shortcomings of artificial intelligence is that it lacks the ability to advise on trade-offs between compliance and strategy. AI is much better at being reactive than proactive, meaning it does not do a great job of implementing strategies that can help reduce businesses' long-term tax liabilities.
Ultimately, the future of AI in the tax services industry is one in which it is a tool used to support the efficiency of tax firms. Tax firms that combine AI and human expertise will benefit from it. Smaller firms that embrace artificial intelligence will not be the ones that lose; those who ignore AI will be the ones who lose as their competition becomes more efficient, cheaper and better able to handle more clients.
