Can AI Do Business Taxes? Benefits, Limitations, and Current Uses

While AI promises to improve the process of preparing and filing business taxes, current AI applications still require human oversight.

Fact checked by Vikki VelasquezReviewed by JeFreda R. Brown

Artificial Intelligence (AI) technology is having a big impact on the business sector in many respects, including the preparation and filing of business taxes. Currently, the IRS is evaluating AI’s potential applications for tax administration while considering how to minimize any associated risks.

The technology promises businesses easier navigation of tax filing, while streamlined tax administration could mean shorter wait times and more efficient services. However, using AI for business tax applications is not without limitations and concerns, and human expertise and oversight are still necessary.

Key Takeaways

• AI promises significant potential impact for streamlining the tax preparation process for businesses, aiding them in ensuring tax compliance and identifying potential tax risks and errors.
• AI can help improve the accuracy and efficiency of business tax filing when it comes to categorization and data processing.
• Since AI is limited in its ability to analyze and interpret complex business tax scenarios, human oversight and expertise remain crucial in the tax preparation and filing process.
• There are several different tax preparation software options available on the market that incorporate AI, with more startups and solutions continuing to develop.

How Can AI Help in Tax Preparation and Filing?

AI-powered call bots and online chatbots, such as those used by the IRS and H&R Block, offer to assist business taxpayers with frequently asked questions and other routine queries as they prepare their taxes, promising to shorten wait times and allow human agents to focus on more complex cases, as well as facilitating 24/7 service.

Automation enabled by AI is also making it faster for taxpayers to receive their returns. In October 2022, the IRS introduced a new AI-powered process to digitize and speed up the processing of paper tax returns and deal with a major backlog from the pandemic.

AI-Based Tax Preparation Software

Many tax software products are also incorporating AI to streamline the tax preparation process for business taxpayers. However, due to the complex nature of business taxes, and the relative recency of AI’s introduction to tax software, most currently available tax software does not use AI to conduct tax calculations. Instead, tax software companies have opted to incorporate AI as a virtual assistant or implement it for specific applications within the software.

This is the case with Intuit Assist, an AI assistant built into certain TurboTax and Quickbooks software packages as well as H&R Block’s AI Tax Assist. Likewise with Reconcile, a software that offers different AI-powered tools to help entrepreneurs and individuals who manage multiple income streams, and FlyFin, a tax filing product aimed at self-employed individuals and business owners.

One exception is AiTax, which states that it uses AI and machine learning technology to prepare and file taxes, claiming to “eliminate the risk of human error and missed opportunities.” However, they also guarantee that all filings are “backed with free audit and in-court legal defense.”

AI and Tax Compliance

AI can also assist businesses in ensuring tax compliance and filing their taxes on time through AI-driven analysis and automated transaction categorization. Software like TaxJar aims to help small to mid-sized e-commerce businesses manage their sales tax compliance across jurisdictions by automatically calculating sales tax rates, classifying products, and doing multi-state filing. It can also integrate with different e-commerce and ERP platforms.

As AI has the ability to process and analyze vast amounts of data, it can also keep track of changing regulations and tax requirements to ensure that businesses are in compliance.

Benefits and Limitations of AI for Business Taxes

AI can improve the tax preparation and filing process for businesses in several ways:

• Streamlining data: AI-powered business tax software tools can import and analyze financial or sales data from other sources, including CRMs, ERPs, and e-commerce platforms.
• Increasing accuracy: AI can keep up to date on changing regulations, and is a useful tool for confirming regulatory compliance in relevant jurisdictions and filing years for things like sales tax and specific tax provisions.
• Driving efficiency: Data entry and organization tasks such as categorizing expenses and sales can be automated with AI to save businesses time.

However, AI technology also presents some potential issues and concerns, which indicate that taxpayers should not rely exclusively on AI to prepare or file their taxes.

• Potential to present false information: AI has been shown to generate errors and present nonsensical information (referred to as AI hallucination), which can have serious implications for business tax filing.
• Limited ability to analyze and interpret: Generative AI models are limited in their ability to analyze tax regulations and interpret context or relationships between tax code sections that might override one another; as such, they are not a substitute for consulting a trained tax expert, particularly in situations where businesses are dealing with a complex tax situation.

The Future of AI for Business Taxes

As AI technology continues to develop and advance, there are some trends emerging in AI-powered business tax applications. 

More and more tax agencies are using AI virtual assistants to cut down on customer queries so that their human agents can focus their attention on addressing more complex cases. However, there is a lot of room for improvement as many AI tools are currently generating incorrect or irrelevant answers to straightforward tax queries.

There are also more AI startups looking to harness AI for business tax preparation. One example is april, a company offering embeddable tax filing software to the fintech, financial services, and employee benefits industries.

The potential impact of AI on the future of business tax preparation and filing is immensely promising. The Taxpayer Advocate Service (TAS) estimated that the average small business spent roughly 82 hours and $2,900 on tax compliance in the 2022 financial year, while business entities in the US spent a cumulative 1.14 billion hours and $48.3 billion on tax preparation. As such, improvements in accuracy and efficiency offered by AI will have a material impact on the day-to-day operations and budgets of businesses.

What Are The Benefits Of AI-Based Tax Software Over Regular Tax Software?

AI promises benefits such as increased efficiency and accuracy when it comes to tax filing, as well as streamlined processing of financial and sales data. However, the introduction of AI to tax software is relatively recent and still a work in progress, so it’s advisable to maintain an element of human oversight in preparing taxes and consult an expert when needed.

What Is The Most Popular AI-Based Tax Preparation Software?

Popular tax preparation software tools like TurboTax and H&R Block have introduced AI assistants within some of their packages. Other business tax preparation software tools include Reconcile, FlyFin, and AiTax.

How Will AI Impact Tax Preparers?

AI bots can answer common taxpayer questions, while generative AI tools built into tax software can help taxpayers stay on top of changing regulations and maintain compliance. AI-driven automation can streamline financial or sales data extraction, entry, or categorization.

Will AI Replace Accountants?

A 2023 survey of tax and accounting professionals revealed that, while ChatGPT may prove useful for basic research applications, it is inadequate in replacing the judgement of experienced professionals, which is needed to interpret complex tax scenarios. Meanwhile, a 2024 journalistic review of TurboTax and H&R Block’s AI tools revealed that they often gave wrong or irrelevant answers to basic tax questions.

The Bottom Line

As more AI startups enter the tax software space and AI technology continues to develop, taxpayers and tax agencies alike will look to take advantage of the increased efficiency, data analysis capabilities, and automated workflows that AI has to offer. Even the IRS is looking to AI to identify “compliance threats” and reduce the number of unnecessary audits it conducts.

While AI has been implemented into several tax software products and offers promising future applications for business taxes, the nature of tax preparation and filing is still complex enough to warrant human oversight and interpretation.

Read the original article on Investopedia.