The tax industry is an exciting place for artificial intelligence (AI) and automation to thrive. Tax professionals have to prepare and file millions of returns every year, but humans aren’t the best at meticulously repeating things. You want to be creative and not just follow a script.
Because of this, automation has been extremely useful in cleaning up repetitive tasks—especially calculating standard penalties. However, it also offers insight into how accurate filings can be in the tax world.
Applying AI and automation to tax preparation and compliance
Tax preparation and compliance is one area where the industry has used AI with notable success. These processes are based on algorithms that comb through large tax records to find patterns and identify anomalies.
These features have already helped streamline processes like risk assessment and compliance, making them more efficient for accountants and auditors.
Here are some ways tax professionals can apply AI to tax preparation and compliance.
1. Automates tax entries
Tax season can be stressful with all the forms and requirements. It is therefore up to you and your tax advisor to report everything correctly. AI can ease some of that pressure 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 when entering data by providing an audit trail for every user action. The AI can detect discrepancies between two sets of numbers, so there is no error when processing the tax returns.
2. Classifies tax-sensitive transactions
AI can classify transactions according to their tax liability. Found a poll that 86% of taxpayers found this helpful in automating their transactions. It works by identifying transactions that are taxable and non-taxable. Subsequently, products and services are assigned to the appropriate tax category, which improves the calculation accuracy.
Users can further automate this process with other technologies like natural language processing and machine learning.
3. Predicts the future of tax debt
Machine learning is a type of AI that allows computers to learn from data and use algorithms to make predictions. In the tax industry, it is useful for analyzing regulatory communications. It can identify patterns in the tax deposit process to predict future liabilities.
It can also help identify tax fraud and evasion. By analyzing large data sets, disjointed information that might otherwise have gone undetected can be linked.
4. AI identifies potential deductions and tax credits
AI also helps users identify potential deductions and tax credits. It may not be able to determine the validity of these claims, but it can help you determine if they are worth pursuing.
This feature can be especially useful when dealing with business expenses.
The IRS maintains several databases that list all legitimate deductions and credits. However, they are not always easy to navigate. It can take hours to search these sites to find a deduction or credit for a person’s situation.
Therefore, the 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. Determining how changes in tax policy, economic conditions and business growth are affecting a company’s financial condition gives a clearer picture of what to expect in the year ahead.
This feature is especially helpful as companies face various changes made by Congress and the IRS.
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 it can automate, but some areas remain challenging for machines. Therefore, taxes still require people to do certain jobs.
For example, tax audits are a common type of tax-related process. They require people to determine if someone owes money when they return, or they fundamentally misunderstand how taxes work.
Audits make it difficult for computers to determine whether a person intentionally deceived the government or made an honest mistake on their tax return. This is something that only human judgment can do at this time.
Fraudulent returns often require careful consideration by trained professionals who understand how people could cheat their taxes through various loopholes.
Another example where taxes require human intervention is the establishment of appeals processes. If you receive a rating that you do not agree with, you can appeal to lower it. However, it is not that easy to ask. You will need to provide evidence to support your claim, which is a job for an experienced tax team.
Will we still need tax experts in the future?
The tax industry is complex and dynamic. Even if humans 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 processing data. However, it takes someone with experience to know what types of deductions you are entitled to — and what expenses you can include in your business.
In short, there will still be a need for tax professionals. However, you must adapt to technology and learn new skills to become more efficient. They also have to work with AI, which means they have to understand the software and train it in certain areas of expertise.
Improve your tax processes with AI
AI is having a profound impact on the tax industry. It’s not perfect, however, and there’s no one-size-fits-all solution for automating your taxes. The best way to maximize the benefits of AI while minimizing the downsides is to keep an open mind.
At the same time, you still need the expertise of a tax professional to guide you through the process if necessary.