In a recent investigation by the Washington Post, it was found that the tax advice rendered by TurboTax and H&R Block was not just unhelpful, but simply wrong. The reason? They were AI-generated. Here is a very simple thing that we need to understand – accounting or any other field – AI does make errors.
The kind of errors that TurboTax and H&R Block have been making are pretty alarming. For example, when a user asked H&R Block Systems about children’s taxes if they go out for college, it said that they had to file taxes in both places. That can’t be right, can it? Errors like these have serious financial implications on the organization giving such poor advice and the user if they aren’t aware of the processes.
Tax, especially tax advice, can’t be taken so lightly. The tax codes, deductions, credits, and exceptions need expertise and a general AI model most definitely lacks it. In this article, Finsmart Accounting – trusted globally for outsourced accounting services in India – will share everything about issues associated with AI-generated tax advice and expert tips to tackle them.
Common risks associated with AI-generated tax advice:
While AI tax software are being constantly updated and being worked towards making them better, we aren’t there yet. AI is supposed to be a support, not your assistant who does it all. That’s why we must be familiar with common risks associated with AI tax tips and guidance. Here are a major risks:
– Flawed results:
One of the most common challenges since the advent of AI in accounting and taxation is that individuals and businesses are tempted to trust AI algorithms. They assume the accuracy of the results. There is a vast amount of data that is fed into AI every single day. The confidentiality, proprietary, and accuracy are highly debatable.
If the data is biased, or outdated, the chances of the recommendations being flawed are very high. AI algorithms can also produce unexpected results or make absurd assumptions, leading to faulty tax advice. When individuals and businesses make decisions based on that, they become liable to penalties, audits, etc.
– Lack of Human Judgement:
Human judgement, especially in tax advice, is irreplaceable. AI algorithms might excel at processing data and identifying patterns, but there is no contextual insight or nuanced understanding. They also fail to realize if an exception has to be made. Tax regulations are convoluted and they need constant evolution, careful interpretation, and judgment calls based on real-world experience.
While human tax professionals can assess one-of-a-kind circumstances, provide legal interpretations, and curate personalized advice, AI-based tax advice can often seem general, overlooking critical nuances.
– Privacy and security concerns:
Cyber threats and data breaches have become increasingly common. AI-based tax advisory services continue to increase the concerns. Advisory services often need access to sensitive financial information like income statements, and social security numbers, and failing to handle them carefully can lead to a breach of data privacy, and confidentiality, and risk of unauthorized access or misuse.
AI algorithms also run into a high risk of manipulation, hacking, or exploitation. A security breach or data leak could expose individuals to severe financial loss.
Recommended: Everything you need to know about tax fraud
– Legal Compliance:
Tax advice without a thorough understanding of the regulatory and legal consequences can be dangerous. Tax laws vary in every jurisdiction and are subject to regular changes and updates. While updating the AI systems regularly is the need of the hour, it does not always happen on a real-time basis. Failure to abide by tax laws and regulations leads to non-compliance, penalties, and legal consequences.
AI-based tax advice can also raise ethical and legal questions about transparency and accountability. The grappling question is who takes responsibility if an AI algorithm provides misleading advice? How do users verify the accuracy of such advice?
Well, does that mean we stop using AI for taxation or other relevant accounting tasks? Absolutely not!
How to build trust with Generative AI?
An accounting firm will always run into the risk of facing the same fate as Turbo Tax and H&R Block if there is carelessness. As AI continues to evolve and becomes an integral part of our systems, transparency and accountability remain key. Accounting firms must take security and privacy into account and communicate them seamlessly to the clients. Encryption, secure data storage, and access controls, adopting best industry practices, and constantly layering the AI-driven results with a human layer continue to be essential.
Another important aspect is to educate your clients about generative AI. Talk about the benefits, and limitations, and ensure that they are safeguarded. Make sure to advise your clients to avoid uploading any personal data directly on the AI platforms. They should come to you as the first point of contact to make sure they have the right data and are safe.
Recommended: Learn about outsourced bookkeeping cost in India.
– Tackling issues of Generative AI head-on:
AI is a powerful tool. What is important here is to use verified, trustable data sources with AI rather than taking AI’s advice as the word of God. As we continue to use AI to our advantage, it is essential to use the platforms wisely. Here are some of the key ways to make AI work in your favor:
– Add up Human Expertise to AI:
While the insights that AI offers are fast and invaluable while helping automate routine tasks and making your life easier, complementing AI-driven tax advice with human expertise is more important than ever. Tax professionals are qualified and seasoned and there is no reason why their judgment should be judged. Consulting with qualified tax professionals can help clients reach the right conclusion.
– Cross-checking recommendations:
Trusting AI-driven recommendations blindly can be detrimental to businesses. Accounting firms must verify and cross-check the results before sharing the conclusions with the clients. Check for trustable resources and seek legal guidance and expert opinions if needed.
– Inform and stay informed:
It is not enough to merely educate and spread awareness among your clients. You must gain knowledge and stay informed as well. The tax laws and regulations are constantly changing. Education and awareness are the only ways to understand the limitations and risks associated with AI-driven advice.
– Prioritise data security and privacy:
For accounting firms, it is important to choose AI tools wisely. Service providers that cater to data security, privacy, and regulatory requirements are absolutely important. Keep your customers aware and informed about maintaining data security and ensure that they do not share critical personal data online.
Recommended: Learn everything about real estate accounting.
Protecting yourself from the dangers of AI-powered tax advice
The safety and security of your clients and the reputation of your firm depend solely on how you decide to use AI to your advantage. AI has its own share of challenges – all we need to do is be careful in our attempt to preserve the integrity. As we continue to navigate through AI technology in different aspects of our business, it is essential to strike the balance between innovation and risk management.
If you need help with tax advisory services while maintaining regulatory compliance, write to us at connect@finsmartaccounting.com to learn more about outsourcing,
Don’t forget to check out these services and recent blogs:
Outsourced financial controller services
Accounting conferences of 2024
Accounting practice management software
Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
