Credit: aiwhim.com
The Use of AI in Taxation
The use of artificial intelligence (AI) and machine learning in taxation is a broad spectrum, from the simple processing of data and forms to the complex implementation of algorithms that can predict the likelihood of a company undergoing a tax audit or navigate uncertain situations within tax regulations.
Tolley’s 2021 report, “Tax Horizons: The Tax Technology Horizon”, explains that AI and machine learning can be used independently or in conjunction with other tools to gain significant insights from data. These applications are scalable to businesses of all sizes, from a micro-entity using off-the-shelf software to categorize expenses to a global conglomerate predicting the tax implications of its operations.
However, it is essential for accountants and tax professionals to maintain a critical eye and exercise professional skepticism when necessary. There are still some decisions that are best left to human tax experts.
Here are some specific examples of how AI is being used in taxation:
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Data entry and processing can be made more efficient through automation.
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Identifying patterns in data, such as trends in tax returns or potential fraud, can help taxpayers identify areas where they may be overpaying taxes or where they may be at risk of audit.
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Making predictions about future tax liability can help taxpayers to plan their finances and to make informed decisions about their investments.
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Leveraged to provide guidance to taxpayers on complex tax matters. This can help taxpayers understand their tax obligations and comply with the law.
Impact of AI on Tax Processes
The integration of artificial intelligence into tax processes is a transformative paradigm shift for tax professionals. AI’s innate ability to learn allows it to continuously improve its ability to answer questions and identify complex issues, such as:
Error identification
AI can identify errors in tax analysis, such as miscalculations and misinterpretations of the law
Points of Contention
AI can be used to identify areas of tax law that are subject to interpretation or dispute. This can help taxpayers to understand their rights and obligations, and to develop strategies to minimize their tax liability
For instance, AI can be used to:
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Analyze tax case law and regulations to identify areas of uncertainty
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Identify patterns in tax returns to identify potential areas of non-compliance
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Develop risk assessments for taxpayers to identify areas where they are most likely to be audited
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Generate personalized tax advice for taxpayers based on their specific circumstances
Inadmissible Expenses
AI can help taxpayers avoid claiming ineligible deductions by identifying expenses that are not deductible for tax purposes.
Expenditures eligible for targeted tax incentives
A leveraged to assist taxpayers in maximizing their tax savings by identifying expenditures that qualify for tax incentives.
Tax Users of AI
Artificial intelligence (AI) is increasingly being used by tax authorities to improve tax compliance, efficiency, and taxpayer service. AI can be used to automate tasks, improve risk assessment, and provide better insights into taxpayer behavior.
Fraud detection and risk assessment
AI can be used to identify potential fraud or discrepancies in the data that is submitted to tax authorities. This can help to segment taxpayers by their likelihood of non-compliance and to target resources accordingly. For instance, AI can be used to identify taxpayers who are likely to underreport their income or who are likely to claim fraudulent deductions.
Behavioral prediction
With enough data points, it can predict taxpayer behavior, such as the likely outcomes of introducing new tax policies or tax reliefs. This information can be used to improve the design of tax laws and to target taxpayers with tailored messages. Used to predict which taxpayers are likely to be affected by a change in the tax rate, or which taxpayers are likely to respond to a new tax incentive.
Communication with taxpayers
AI-enabled communication tools, such as chatbots, can be used to reduce the need for human interaction with taxpayers. This can save costs and provide taxpayers with continuous support. A chatbot can be used to answer taxpayers’ questions about their tax returns or to provide them with updates on their tax status.
Automated processes
AI can be used to automate tasks such as determining a taxpayer’s employment status or recommending that a taxpayer seek advice. This can free up human resources to focus on more complex tasks. AI can automatically process tax returns or to identify potential risks for further investigation.
Tax collection in the sharing and gig economy
By embedding AI into the platforms that facilitate these economies, tax authorities can improve compliance without creating an administrative burden for taxpayers. Track payments made through these platforms or to identify taxpayers who are likely to be non-compliant.
From a practice perspective, AI has the potential to revolutionize the way in which tax advisers support their clients. AI is already being used to improve compliance and automate repetitive tasks. As the technology evolves, its use will extend to more advanced tasks such as:
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Reviewing high volumes of trust agreements to classify the trust type for tax purposes.
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Reviewing licensing agreements to see whether they qualify for research and development incentives.
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Identifying whether tax notices issued by tax authorities are for information purposes or require action or responses.
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Classifying expenses for direct and indirect tax returns.
Overall, AI has the potential to significantly improve the way in which tax authorities and tax advisers operate. By automating tasks, improving compliance, and providing better insights, AI can help to make the tax system more efficient and fair.
Remarks
The use of artificial intelligence (AI) in taxation is rapidly evolving, with applications ranging from automating tasks to providing guidance to taxpayers. AI has the potential to revolutionize the way that taxes are managed, making it more efficient and fair.
However, it is important to note that AI is not a replacement for human judgment. Accountants and tax professionals still need to be able to exercise professional skepticism and to make decisions that are in the best interests of their clients.
The use of AI in taxation is still in its early stages, but it has the potential to make a significant impact on the tax industry. It can help to make the tax system more efficient, fair, and accessible to everyone.
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