As technology continues to advance at a rapid pace, artificial intelligence (AI) has become an increasingly popular tool in various industries, including finance and accounting. In a February 2024 survey, approximately 20% of Americans used AI software to review their tax returns. While AI software offers benefits like speed and convenience, there are several pitfalls to be aware of when using AI to assist in the preparation of your taxes.

Accuracy and Errors

One of the most significant risks of using AI software is the potential for errors. While AI can process large amounts of data quickly, it is not immune to mistakes. Errors in algorithms or user input can lead to incorrect tax returns, which can result in penalties, fines, or even audits.

Limited Contextual Understanding

AI lacks the nuanced judgment that accountants possess. This can be a major limitation when it comes to interpreting complex tax laws or understanding the context behind specific financial situations. For example, AI might misinterpret the classification of income or deductions, leading to inaccurate tax calculations. Additionally, AI may struggle to understand unique or unusual financial transactions, which could have a significant impact on your tax return.

Lack of Flexibility

AI software follows a predefined set of rules and may not be adaptable to unconventional tax scenarios or specialized business structures. This rigidity can result in the omission of potential deductions or credits that could be beneficial. It may also lead to incorrect categorization of income or expenses, affecting the overall outcome of your tax return. For example, AI may not be able to assist with deciding whether your business should be a partnership or corporation, understand multi-state filings, or know what to do with international income.

Compliance with Tax Laws

Tax laws and regulations are constantly evolving, and AI software may not have the most up to date information. If the software you use is not updated to reflect the latest changes in tax legislation, you could unknowingly violate tax laws. This could result in fines, penalties, or legal trouble.

Security and Privacy Risks

When using AI software, you are entrusting sensitive financial information to a digital platform. This introduces the risk of security breaches or data leaks. A breach could lead to identity theft, financial fraud, or other malicious activities. To mitigate this risk, ensure that you are not entering personal information on any AI platform.

AI technology is not going away. However, the pitfalls surrounding this technology are apparent. I suggest consulting with your KT tax professional. We will provide the assistance and care that your tax return deserves.