The Role of Artificial Intelligence in Tax Law: Opportunities, Risks, and Best Practices

May 17, 2024

Artificial Intelligence (AI) has been making waves across various industries, and tax law is no exception. Using AI in tax law can bring significant benefits, including analyzing data quickly, identifying patterns, and identifying recent law changes. However, as valuable and beneficial as AI may be to a business, it still has limitations and poses significant risks.

Opportunities With the Use of AI

One of the most significant benefits of using AI in tax law is its ability to identify potential tax savings opportunities. AI algorithms can analyze vast amounts of data quickly and accurately, identifying patterns and trends that may not be apparent to human eyes. This can include spotting deductions or credits a taxpayer may be eligible for but has not claimed.

1.) Analyze data quickly. Businesses generate a significant amount of data consistently. Whether credit card statements, invoices, or wire transfers, companies consistently create information that may impact the tax return. With its advanced algorithms, AI can analyze vast amounts of data quickly and accurately to identify opportunities for eligible expenses.

2.) Identify patterns. With the vast amount of information flowing through organizations, it can be difficult for tax directors and CFOs to identify trends and patterns quickly. However, with the advances in AI technologies, businesses can quickly use their already available data to see trends and patterns and react more quickly to developments. This can result in better projecting future tax liabilities and planning finances more effectively.

3.) Identify tax law changes. With organizations moving to multi-state and multi-national operations, keeping updated on changes in every taxing jurisdiction is challenging. However, AI can assist with identifying and flagging changes for further review.

The Risk of Solely Relying on AI

While AI offers many benefits, it’s essential to understand the risks of solely relying on this technology. One of the main limitations of AI is that it lacks the legal background, training, and knowledge that a human tax professional may have.

AI algorithms are only as good as the data they are trained on or the information they receive. The AI’s predictions and recommendations may be inaccurate if the training data is incomplete or biased. Furthermore, tax laws are complex and constantly changing. While AI can be programmed to adapt to these changes, it may not always be able to keep up with the pace of change.

Moreover, AI lacks the ability to understand the nuances and complexities of legal language. AI may not appropriately analyze all available information, including prior court cases and statutory and regulatory guidance, to interpret the tax policy’s intent appropriately. This may lead to misinterpretations and errors in the tax calculation.

Best Practices for the Use of AI in Tax Law

  • Start Small. Begin your journey of integrating AI into your tax department by starting with small, manageable projects. Understand its capability and limitations before fully implementing AI throughout your organization. In addition, by starting small, you can define a clear goal of what you want AI to accomplish: improving efficiency, reducing errors, or consolidating data.
  • Don’t overly rely on AI. While AI can quickly process large amounts of data and identify patterns, it should not replace human judgment. Tax law is complex and often requires a nuanced understanding that AI may not yet be capable of processing. AI should remain a tool in the toolkit, but it is not yet the end-all, be-all.
  • Collaborate with Experts. When implementing AI in your tax department, continue to collaborate with AI experts, data scientists, and tax professionals. The more information you can feed into your AI system, the better the results. In addition, the use of experts can help reduce the risk of misinterpretation of the information that the AI system generates.
  • Maintain Human Oversight. Despite the capabilities of AI, human oversight is still necessary. Due to the potential penalties and interest that companies may face for non-compliance, it’s essential to continue to maintain appropriate oversight of the information that the AI system generates.

It’s important to note that successful integration requires careful planning, regular updates, and ongoing monitoring to ensure the AI system is performing as expected and complying with all relevant tax laws and regulations. In conclusion, while AI can offer significant benefits in tax law, such as identifying tax savings opportunities, it’s important to be aware of its limitations. Solely relying on AI without the oversight and expertise of a human tax professional can lead to errors and misinterpretations. Therefore, the best approach is to use AI as a tool to assist human professionals, not as a replacement. This way, we can harness the power of AI while mitigating its risks.

For more information and discussion on the opportunities, risk, and best practices for AI, please feel free to contact a member of our Tax Practice Group, including our Tax Practice Chair, Demetrius Robinson, at (614) 427-5749 or DJR@kjk.com .