Artificial intelligence is having a heyday that is not likely to end anytime soon. The ease with which you can conduct research, analyze data, and compose communications can make A.I. tools alluring, especially to busy entrepreneurs. How can you balance the use of these time-saving tools with the ethical responsibilities that come with running a tax practice?
One of the top considerations for you as a tax professional is due diligence. You cannot unquestioningly rely on ChatGPT or Blue J as an expert, any more than you should rely on another person without double-checking their recommendations. Remember, for our ethical and professional standards, we must refer to Circular 230 and keep compliance at the top of our minds.
In today’s blog, we’ll review what Circular 230 teaches us about due diligence and how to apply it to the use of A.I.
Due Diligence and Client Information
Circular 230 dictates that tax professionals must exercise due diligence in all tax matters. This means that you must exercise as much care as any reasonable person would be expected to take when it comes to upholding the law. This includes being thorough when asking questions of your clients or third parties. Your goal is to make sure the information you have is correct, complete, and consistent with other known facts. Reasonable actions to take when beginning work with a new client include:
- Authenticating that client’s identity
- Crafting an engagement letter that describes the scope of services to be provided
- Formally defining the mutual responsibilities taken on by you and by the client
- Obtaining sufficient information to fulfill the engagement
This means collecting legal forms of identification and any other data you need to understand the client’s tax situation, whether that’s the prior year’s tax returns or the client’s books and records. If you anticipate that the client qualifies for a tax benefit, this means collecting the hard evidence to prove it. This might all sound like basic best practices as a tax planner, but keep in mind that this is also an ethical requirement. You need to be well-informed about your client’s financial and tax situation to check that “due diligence” box.
Where does A.I. come into play? First, it’s an unfortunate reality that A.I. has made it easier to commit identity fraud. This means it’s as essential as ever to be thorough in authenticating a new client’s identity. Second, a common use of artificial intelligence is to summarize and synthesize information. However, if your client provides you with incorrect, incomplete, or inconsistent data and you put that into an A.I. tool, you are going to get questionable results. Consider, do you have all of the data you need or could you be missing any key facts? Answering this question is key to completing your due diligence.
Due Diligence and Written Advice
Circular 230 also specifically speaks to due diligence on written advice. Once you’ve collected all the necessary information from your client, it’s time to turn this knowledge into recommendations for a tax strategy. Once again, you need to be careful about what you ultimately put in writing. When providing written advice, be sure to:
- Identify the material facts and circumstances
- Factor the material facts and circumstances into your tax plan
- Temper your reliance on representations, statements, findings, or agreements
- Determine how tax law applies to the facts of your client’s situation
- Make reasonable assumptions based on actual facts and laws
- Set aside the possibility of an audit when making determinations
As you look through this list, notice how these are steps that A.I. cannot take on for you. At the center of this process is your own ability to assess the relevant information, apply tax law, and make assessments without overly relying on non-authoritative sources and ideas. Resist any temptation to input your client’s tax situation into an A.I. tool and take its recommendations without doing your own follow-up and analysis.
The regulations do allow you to rely on other professionals’ work with “reasonable care.” This can be applied to the use of A.I. If you use A.I. to analyze data or recommend tax laws and court cases for you to look into, reasonable care means putting in the effort to evaluate if the A.I. output is reliable. Take, for instance, A.I. tools’ problems with “hallucinations.” If you ask A.I. to provide a court case that shows you can claim a certain deduction, A.I. tools have been known to generate details on a court case that doesn’t actually exist. There is a point at which you will have to take the reins and find a firm foundation for your tax positions.
Remember, at the end of the day, the only person who will be held responsible for the recommendations you make to your clients is you! Your responsibility and liability is not something that can be outsourced to A.I.
Due Diligence and The Risks of A.I.
What are some of the other risks that come with the use of A.I.? First, consider the security risks. Open-source AI models like ChatGPT can expose a client’s personal identifiable information (PII). Take precautions to redact any confidential information before running data through an A.I. tool.
Lack of transparency is another issue. When you receive a response from the A.I. tool, do you know where exactly it’s coming from? Fortunately, some models can provide links to sources either upon request or automatically. You can use these sources to validate the results by reading the actual court cases, citations, tax laws, and other sources. Be wary of biased results and familiarize yourself with strategies for composing effective A.I. prompts. You will want to avoid phrasing your request in a way that might sway the tool by removing language that makes assumptions that a certain position is correct or that a court case on a certain topic must exist.
Finally, consider the limitations that may be inherent in how A.I. tools are trained. Even A.I. that is tax-oriented often relies on a curated list of tax authorities that are considered the most “useful” and “relevant.” In many cases, this makes perfect sense. If the makers of the tool are thorough enough, a majority of the time tax professionals may get what they need. But what about that 5% of the time when you need to cite a revenue ruling from the 1950s that is considered irrelevant by the A.I. system but is the best authority available when it comes to your specific question? Even if A.I. gets you 95% of the way there in assessing all relevant facts, due diligence requires you to make sure that final 5% is covered.
Summary
The final word of wisdom when it comes to A.I. is that we must resist the temptation for a quick answer. Responsible and ethical tax planning cannot rely on shortcuts. Knowing the limitations of A.I. can help you to differentiate between the times when technology can help you execute on tasks more quickly and effectively and the times when you need to put in the hours yourself.
To educate yourself fully on due diligence requirements, you want regular training that factors in the latest evolutions in technology, tax law, and more. Take the next step by signing up to be a Certified Tax Planner today!
