Leveraging AI Efficiencies for Tax Filing and Processing
Many state and city tax agencies are annually inundated with a glut of returns from last-minute income tax filers.
Now, however, some are using AI to make the process more efficient and cost-effective.
AI is in every sector these days, so it should be no surprise that taxation departments are turning to AI tools to accelerate and improve tax filing, processing, and compliance.
For example, Taazaa built a custom AI tax filing assistant for an Ohio city to automate the extraction and classification of data from various tax forms. The system is integrated with the city’s core systems to enhance efficiency.
Corporate accountants leverage similar AI systems to automate complex tax compliance and reporting tasks, perform intricate calculations and analyses, and identify potential tax planning opportunities.
Even the IRS is starting to use artificial intelligence to improve return processing and help expose tax evasion and fraud. They’re also rolling out an AI agent to help IRS employees quickly find answers to complex inquiries from taxpayers.
However, AI tax solutions have challenges and limitations, namely in terms of data quality and security. This article explores the advantages and drawbacks of AI tax processing solutions.
AI’s Growing Role in Tax Processing
Tax authorities nationwide increasingly recognize AI’s potential for enhancing the efficiency and accuracy of tax return processing and improving overall tax administration.
Earlier this year, Deloitte published a report based on a survey of 1,000 tax and finance leaders and a series of interviews with multinational heads of tax. That report, Rising to Meet the Moment: Tax Transformation Trends 2025, found that “tax and finance leaders are focusing on data, compliance cost management, automation and, increasingly, AI.”
For example, 45% of tax leaders will seek AI specialist skills over the next two years. In addition, 42% said data analytics and data-driven strategic insights, and 36% identified specialist tax technical skills. All three of these skill sets relate to AI.
“Everybody knows that if you want to stay relevant within Tax, you need to master AI,” said Ralf Pieters, Head of Tax at AzkoNobel and one of the survey respondents.
Keeping Up with Regulatory Requirements
The growing exploration of AI tax solutions is driven in part by more stringent reporting requirements worldwide, including OECD Pillar Two disclosures and real-time tax data access. To comply with these requirements, tax professionals need a level of data granularity that forces them to access, validate, and analyze vast amounts of information—a process that AI can help accelerate.
In addition, tax specialists need tax-sanitized data. Formatting that data properly requires the right expertise and technology, which may require the tax agency to invest in advanced analytics and integrated tools.
Reducing Human Error
Another driver of AI adoption in the tax industry is automating routine data entry and processing to eliminate human error and accelerate processing time. Likewise, AI is also being deployed to improve the accuracy of tax calculations and analyze large datasets for tax compliance.
By absorbing manual and time-intensive tasks, AI tax solutions free up professionals for higher-value work.
Corporate Tax Compliance and Reporting
AI tax solutions are giving businesses new ways to simplify complex accounting processes and enhance the accuracy of corporate tax compliance and reporting.
AI-enhanced accounting solutions automate much of the business bookkeeping and accounting functions, as well. AI solutions securely store and analyze financial data, improving efficiency and reducing the chance of error and fraudulent activity.
AI can also monitor tax regulations and immediately alert accountants to changes. By continuously scanning global regulatory databases, AI systems can identify and flag any tax policy changes or updates that might impact a business’s operations. Businesses can then make timely adjustments to their budgeting, reporting, and overall compliance strategies to avoid potential penalties.
Enhanced Compliance and Reporting
AI can also identify compliance gaps. These systems analyze tax-related data, find potential issues, and alert business users to take corrective action before they incur penalties.
Some AI solutions automate corporate data entry and expense tracking. By automatically capturing and categorizing transactions, these intelligent tools significantly decrease the need for manual data input, further reducing the risk of human error while freeing up accountants for more strategic tasks.
When it comes to reporting, AI tax compliance tools can generate real-time financial reports that meet tax industry standards. These reports prepare businesses for tax season and help them make informed decisions throughout the year.
AI tools automatically calculate the relevant taxes and ensure compliance with the latest regulations for businesses operating in regions with specific tax requirements, such as Goods and Services Tax (GST) and Business Activity Statements (BAS). These AI systems continuously monitor regulatory changes and provide compliance alerts and real-time updates.
While many businesses develop custom AI-powered tax software, some established tax software providers are also integrating AI into their platforms to enhance corporate tax compliance and reporting. For example, Thomson Reuters ONESOURCE leverages AI to automate various aspects of tax compliance, reporting, and data management.
Predictive Modeling and Tax Research
Beyond compliance, AI solutions can use predictive modeling to identify potential expense reductions and income opportunities by analyzing historical, external, and non-financial data.
This extends to automating technical tax research. AI can save tax professionals countless hours by rapidly conducting multiple searches, reviewing relevant materials, and generating summaries.
AI tax assistants, such as Bloomberg Tax Answers, further enhance efficiency by providing quick and precise answers to complex tax questions, along with citations to authoritative sources.
AI’s forecasting capabilities also enable businesses to identify tax planning opportunities. Predictive analytics allow companies to estimate future tax liabilities and accurately identify potential savings. Businesses can simulate the financial impact of prospective tax changes or corporate decisions.
AI helps multinational corporations across multiple jurisdictions navigate complex international tax regulations. This function allows organizations to optimize cross-border transactions and manage transfer pricing risks. Likewise, these systems can analyze complex datasets to identify deductions, exemptions, and incentives that humans using manual processes might miss.
Navigating the Challenges and Limitations of AI in Tax
While AI tax solutions offer numerous benefits, they come with challenges and limitations, particularly concerning data quality, security, and the indispensable role of human oversight.
Finding Tax AI Experts
The skills to build AI are in high demand, making it challenging for any business to find AI developers, data engineers, and other AI-related roles.
For the tax industry, that challenge is even greater. Tax leaders know they need AI capabilities to stay competitive, but any AI talent they hire must also have tax expertise. Finding professionals with both is slicing a thin piece of pie even thinner.
While internal upskilling programs can help close the gap somewhat, many tax professionals find partnering with an AI development company more cost-effective. Ninety-four percent of the Deloitte survey respondents said outsourcing gave them access to the “latest technology capabilities,” with 67% rating it as a “major/significant benefit.”
Improving Accuracy
AI solutions can handle complex tasks, like tax forecasting and risk assessment. However, the industry is slower to deploy AI for these tasks because they require a high degree of accuracy. Over three-quarters of the respondents to Deloitte’s survey said they require 90% accuracy or higher from AI tools used in critical processes.
Improving AI accuracy is a twofold challenge. First, the AI model must be built and trained to ensure it functions properly. Second, it must be fed high-quality data.
The accuracy and effectiveness of AI tax applications relies heavily on the quality of the data the AI consumes. Inaccurate or incomplete data can lead to errors in tax calculations, incorrect identification of deductions or credits, and ultimately, compliance issues. Tax data management systems must ensure the integrity of the information used by AI tools.
Data Security
Security and privacy of sensitive financial information are also of paramount importance. Given the highly confidential nature of tax data, tax leaders have valid concerns about identity theft and unauthorized access, especially when using open-source AI platforms.
Strong encryption, secure data storage, and other security measures can mitigate these risks and build trust among users and clients. Likewise, AI development companies need to be completely transparent in how their AI algorithms handle and protect data if they want to foster confidence in their tax AI technologies.
The Need for Oversight
Despite AI’s increasing sophistication, human oversight and expertise remain indispensable in the tax domain, especially when dealing with complex or nuanced tax situations. AI may struggle with the interpretation of intricate tax codes and regulations, as well as with unique or unusual financial circumstances.
Additionally, open-source AI platforms have been known to generate inaccurate or nonsensical information: the now-familiar “AI hallucinations” phenomenon. The potential for AI to fabricate incorrect responses necessitates careful verification and validation by human experts before any AI-generated output is relied upon for tax purposes.
The ability of AI to analyze and interpret context within complex tax scenarios is still limited. While AI can process vast amounts of information and identify patterns, it may lack the deep understanding of the relationships and nuances within tax law that a trained human expert possesses. As such, AI cannot yet fully substitute for the judgment and experience of a tax professional, particularly when navigating intricate tax issues.
Additionally, AI tools may sometimes misclassify expenses or overlook specific tax nuances that a human with relevant expertise would readily identify. The accuracy of AI in categorizing financial data depends heavily on the quality and breadth of its training data, and it may not always be equipped to handle edge cases or unusual financial activities effectively.
The Future of AI in the Tax Industry
Artificial intelligence is inexorably transforming the landscape of income tax filing and processing for governments and corporations. AI-powered tools offer significant advantages in terms of efficiency, accuracy, and automation, streamlining complex processes and providing valuable insights.
AI’s impact on the tax industry is projected to be profound and transformative. Tax leaders will need to adapt to this evolving landscape by acquiring new skills in data analysis and AI tool proficiency while also honing their strategic thinking and client interaction abilities.
Continuous learning and a willingness to embrace technological advancements will be crucial for success in the AI-driven future of tax. As AI continues to evolve and become more integrated into tax practices, it promises to create a more efficient, accurate, and ultimately, more beneficial tax ecosystem for all stakeholders.
If you want to leverage the power of AI to assist with your tax processing, ask us about our custom, AI-enabled tax solutions. Contact Taazaa today!
