The tax industry is an exciting place for artificial intelligence (AI) and automation to flourish. Tax professionals must prepare and file millions of returns each year, but people aren’t the best at repeating things meticulously. They want to be creative and not just follow a script.
That’s why automation has been extremely useful in cleaning up repetitive tasks — especially when calculating standard deductions. However, it also provides insights into how accurate filings can be in the tax world.
Applying AI and Automation to Tax Preparation and Compliance
Tax preparation and compliance is an area where the industry has applied AI with notable success. These processes rely on algorithms combing through large tax data sets to find patterns and identify anomalies.
These capabilities have already helped streamline processes like risk assessment and compliance — making them more efficient for accountants and auditors.
Here are some ways tax experts can apply AI in tax preparation and compliance.
1. Automates Tax Entries
Tax season can be stressful with all the forms and requirements. Therefore, it’s up to you and your accountant to report everything correctly. AI can take some of that pressure off and automate the tedious process.
AI automates tax entries directly into your accounting software or business system so you don’t have to manually enter every single data point.
It also eliminates human error in inputting data by providing an audit trail of every user action. AI can detect discrepancies between two sets of numbers so there’s no mistake in processing the tax returns.
2. Classifies Tax-Sensitive Transactions
AI can classify transactions according to their taxability. One survey found that 86% of taxpayers have found this helpful in automating their transactions. It works by identifying transactions that are taxable and nontaxable. Then, it matches products and services to the appropriate tax category, improving calculation accuracy.
3. Predicts the Future of Tax Liabilities
Machine learning is a type of AI that allows computers to learn from data and make predictions using algorithms. In the tax industry, it’s useful for analyzing notices from regulators. It can identify patterns in the tax lien process to predict future liabilities.
It can also help with identifying tax fraud and evasion. Analyzing large data sets can connect unrelated pieces of information that may otherwise have gone undetected.
4. AI Identifies Possible Deductions and Tax Credits
AI also helps users identify possible deductions and tax credits. It may not be able to determine the validity of these claims, but it can help you determine whether or not it’s worth pursuing.
This feature can be especially useful regarding business expenses.
The IRS has several databases that list all legitimate deductions and credits. Still, they’re not always easy to navigate. It can take hours to sift through these pages to find one deduction or credit to apply to an individual’s situation.
Therefore, AI can do all the heavy lifting in this aspect.
5. Helps With More Accurate Tax Forecasting
AI and machine learning can help tax professionals make more accurate forecasts. Identifying how tax policy changes, economic conditions and business growth impact a company’s financial situation provides a clearer picture of what to expect in the coming year.
This feature is particularly helpful as businesses face various changes that Congress and the IRS have placed.
Can AI Automate Everything in the Tax Industry?
It’s important to note that AI can’t automate all tasks — at least not yet. There are many processes that it can automate, but some areas remain challenging for machines. Therefore, taxes still require humans to do certain tasks.
For example, audits are a common type of tax-related process. They require humans to determine whether someone owes money on their return or they fundamentally misunderstand how taxes work.
Audits make it difficult for computers to determine whether a person has deliberately misled the government or made an honest mistake in filing taxes. This is something that only human judgment can do well right now.
Fraudulent returns often require careful review by trained professionals who understand how people might cheat on their taxes using various loopholes.
Another example where taxes require human intervention is building appeals cases. When you receive a valuation you disagree with, you can appeal to lower it. However, it’s not as simple as asking. You must provide evidence to support your claim, which is a job for an experienced tax team.
Will We Still Need Tax Professionals in the Future?
The tax industry is a complex and dynamic one. Even if people can use AI to automate certain aspects of tax preparation, there will always be a need for human interpretation and expertise — at least, for the foreseeable future.
For example, an AI system can calculate your income taxes in seconds by crunching through data. However, it takes someone with experience to know the types of deductions you're eligible for — and which expenses you can include in your business.
In short, there will still be a need for tax professionals. However, they will have to adapt to the technology and learn new skills to become more efficient. They will also need to work with AI, meaning they must understand the software and train it in certain areas of expertise.
Elevate Your Tax Processes With AI
AI has a profound impact on the tax industry. However, it’s not perfect, and there is no one-size-fits-all solution to automating your taxes. The best way to maximize the benefits of AI while minimizing its drawbacks is to keep an open mind.
At the same time, you’ll still need the expertise of a tax professional to guide you through the process wherever necessary.