AI & TAX
AI in accounting and tax compliance: the possibilities and pitfalls
Artificial Intelligence can transform accounting and tax compliance by streamlining processes and navigating complex regulatory frameworks. Care is needed in designing, deploying and policing AI rollouts properly states Csaba Farkas of TMF Group.
Since its introduction to the world at the end of last year, ChatGPT has had an indelible impact on the AI technology landscape with the introduction of Google Bard and other AI-powered software systems. Within a matter of weeks, ChatGPT has become the fastest growing website in history. Undoubtedly, AI technology is revolutionising numerous industries and functions, and the realm of accounting and tax compliance is no exception.
Simultaneously, the finance function is constantly challenged to redesign the way in which data is collected, analysed and reviewed as tax laws and accounting regulations are continually evolving, at both the local and global levels. The integration of AI technologies in the areas of accounting and tax compliance has the potential to bring about significant improvements, but there are considerable risks that businesses should take into account.
How AI is reducing the accounting and tax compliance load
When appropriately set up, deployed, trained and kept up to date, AI tools can significantly reduce the accounting and tax compliance workload in three key ways:
1. Automating data collection and entry
AI-based automation reduces the burden of manual data entry, minimising the risk of human error, and freeing up time and resources for more strategic tasks.
There are already several AI- and machine learning (ML)-based data entry tools and applications available to alleviate the burden of transactional accounting and tax work. Typically, data entry automation tools make use of capabilities like Robotic Process Automation (RPA) and Optical Character Recognition (OCR), in combination with AI/ML capabilities, to eliminate manual data entry effort and errors.
AI is adept at handling repetitive tasks like processing information from multiple formats to complete the appropriate tax forms. For example, AI can allocate financial data captured from invoices, receipts, bank statements, emails or images into the appropriate tax category, based on tax rules, vendor information, value, location, and time of day.
2. Intelligent data analysis and prediction
AI-powered tools are especially good at real-time data analysis. By helping to identify potential accounting and tax compliance issues promptly – and automatically providing alerts and notifications – AI systems help ensure timely action to prevent potential penalties and reduce the probability of tax audits.
AI tools can not only make these analyses and predictions based on the internal company data (such as past financial statements), they can also take into account external, publicly available information such as market trends, current tax revenue levels or the number of audits being conducted by the jurisdiction, to model accounting and tax risks and opportunities for the business.
3. Enhanced regulatory compliance
AI algorithms can be deployed to keep abreast of complex, evolving accounting and tax regulations and automatically update the compliance processes to help ensure businesses remain compliant.
It can automate the tax preparation process by analysing financial data, identifying relevant tax forms and regulations, and calculating tax liabilities.
When set up and updated properly, AI can help companies monitor regulatory changes, ensure compliance with accounting standards and regulations, and generate accurate compliance reports.
Obstacles to adoption
It is vital to understand the limitations of AI technology, especially in service-oriented fields like accounting and tax, where the personal touch cannot be neglected.
A recent study conducted by Brigham Young University found that ChatGPT’s performance in answering accounting and tax questions was rather unsatisfactory. Statutory accounting and tax compliance involves complex regulations, which still require human expertise for accurate interpretation and judgement. AI algorithms need to be trained and continually updated to accurately interpret the underlying laws and avoid misinterpretations or non-compliant actions. Human interaction will be needed to achieve this for the foreseeable future.
To work effectively, AI algorithms need complete, accurate and high-quality data to make informed decisions. This can present a challenge when dealing with unstructured data sources like invoices and receipts. What is more, a lot of data is needed for AI algorithms to learn and make accurate decisions and predictions.
Ethical and legal considerations
Among the biggest ethical and legal concerns in AI-driven compliance is ensuring data security and confidentiality. Accounting and tax software usually requires access to sensitive company financial data, as well as personal information, making it a potential target for cyber-attacks and data breaches. Stringent data protection measures and compliance with privacy regulations are essential to maintain confidentiality and prevent unauthorised access to the data which AI tools are handling.
The potential for biases in AI algorithms is significant and widely acknowledged, which could for example lead to unequal treatment in tax assessments. Careful monitoring and diverse training datasets are needed to mitigate any potential biases.
There is also the ethical matter of the impact on jobs if AI tools are taking over much of the basic workload of tax and accounting compliance.
Furthermore, AI tools can sometimes appear to be a ‘black box’. Ensuring transparency and accountability for AI-driven tax decisions is crucial. Businesses must be able to explain and audit AI-generated outcomes, providing clear and understandable explanations to professionals and regulatory authorities.
It will likely be a long time before AI is able to perfectly address complex, judgmental accounting and tax tasks – such as answering subtle taxation, statutory or technical accounting questions based on legal documents, underlying principles and interpretations. Human judgement and expertise will continue to be needed as a complement to AI-enabled processes to ensure compliance, provide the human touch, and ensure a wider strategic fit.
With the right safeguards and synergy between people and AI systems, AI tools will augment human expertise, enabling professionals and businesses to focus on strategic accounting and tax matters, and ensuring ethical practices.
Businesses have an opportunity to benefit greatly from AI in accounting and tax compliance if they embrace it with their eyes open to the challenges.
Main image: Csaba Farkas, Global Head of Accounting and Tax, TMF Group