Tax

Tax Authority Use of AI

Tax authorities have begun using AI to identify issues in returns. It will be critical for Tax Authorities to certify that their AI systems ensure (i) privacy; (ii) transparency; and (iii) accountability for the agents and auditors. Even with humans at the helm of this system, it is crucial that these humans take a hard look at what the AI is generating, before using the results presented.

Potential for the Automation of Various Tasks and Much More

It is well documented that AI has the potential to allow for the automation of many different tasks, however, this can be especially true for tax. These tasks include information gathering, document generation and communications, form completion, preliminary review functions, and other administrative tasks. AI may also be useful for more in-depth analysis including creating a summary and analysis of tax filings, reports and support details, issue spotting, and causal analysis. As international tax rules increase in complexity, AI may assist with streamlining tax return preparation and filing. This may be useful for many practitioners, but it is key for those who use AI to trust, and always verify.

Few Tax-Specific Models

AI models generate responses to inputs based on the data they have available. It is possible for models that pull information online to gather such data from irrelevant sources, thus producing incorrect responses. Taxpayers will need to consider the reliability of AI models in their tax return preparation and filing, as most filings require the certification of the filer under penalties of perjury and there is no indication that reliance on an AI model will be a defense to penalties for underpayment.

Tax Treatment of AI Transactions

AI transactions reflect another step in the evolution of cloud computing, raising considerations with respect to the proper taxation of AI transactions. These questions include source and character of income or expense from transactions, which can impact withholding tax treatment, as well as treatment of transactions for indirect tax (e.g., sales, use, VAT) and digital services tax purposes. The integration of existing rules with these new transactions could have material impacts on the economics of using AI.