Is It the Right Choice for You?

Not long ago, doing your taxes with artificial intelligence meant chatting with a bot while you manually entered numbers into boxes. Today’s AI-powered tax tools deliver much more, allowing you to upload your forms, answer questions conversationally and complete your taxes from start to finish.

While it has many advantages, you’re entrusting quite a bit of information to the process. Your tax return is a legal document filed under your name that represents your entire financial life. If you’re handing that over to AI, you need to carefully consider the risks.

What Does AI Tax Preparation Actually Mean? 

Tax software used to be mostly rules-based. You input X, and the software applied rule Y. AI now enables tools to add additional insight by reading and understanding documents, explaining jargon in plain language and identifying patterns that appear suspect before filing.

Examples of AI features in tax software include:

• Data extraction: Upload a W-2, 1099s or scans of receipts, and let the software identify and categorize relevant data for you. Some can even itemize expenses for business owners or independent contractors.
• Conversational questions: “Did you contribute to a retirement account this year?” appears instead of digging for Line 12b. The software then places the info where it needs to go.
• Automated review: The software points out discrepancies, missing documents and duplicate entries. Some tools also recommend likely red flags or deductions and credits based on what they see.

Where AI Excels and Where It Still Falls Short 

AI tax preparation tends to work best if your return is low to moderate complexity and your records are clean. Standardized, document-driven tax situations with straightforward math are where today’s AI excels.

Complex tax situations, on the other hand, are often driven by judgment calls. Even smart AI lacks legal responsibility (and nuance). Here, the danger is less about math or following the data, and more about selecting defensible positions and understanding their tradeoffs over multiple years.

Today’s AI tools still fall short when your taxes involve:

• Complex business ownership: such as LLCs with inventory, payroll, multiple entities, variable expenses, etc.
• Multi-state filings where you may have residency issues or were a part-year resident
• Rental property: depreciation calculations, repairs versus improvements, income/expense tracking, long-term planning
• Trusts or estate income/filings 
• Foreign income and international taxes paid 
• Tax planning that requires judgment: electing S-corp status, income/revenue recognition decisions, etc.

Garbage In, Garbage Out

Using AI to prepare taxes will almost always cost less than hiring a CPA. It can also be faster. But there are tradeoffs.

Accuracy is reliant on your input. Upload the wrong document, overlook a 1099, label that Uber Eats expense as “business” rather than “personal,” or answer a question incorrectly, and your AI can easily produce an incorrect tax return.

Audit support is also limited. Many AI-powered products promise to help you respond to notices or tell you what to send if you receive a notice. But that’s not the same as having a CPA who will represent you before the IRS.

Ultimately, you are responsible for your AI-prepared tax return: You’re the one who signs and files your return, so you’ll still be held accountable if something’s wrong. The software may make a mistake, but you make the final call.

Privacy and Security Concerns

Tax returns contain about as much personal information as it’s possible to collect such as: income, assets, bank accounts, employers, Social Security numbers, dependent names and addresses.

With so much sensitive data at stake, consider these questions before deciding if AI tax software is right for you:

• Is data encrypted at all points? 
• Can you delete your data, and how long is it retained?
• Are your personal documents being used to train their AI model? Can you opt out? 
• Are any third parties involved in handling your data (processors, analytics firms, affiliates)?
• How will you be notified and supported if there’s a security breach?

The Bottom Line

Tax time can be stressful, but AI promises some help. If your tax situation is complicated and you still want to use AI, try a hybrid approach where a professional accountant reviews everything before you send it off.

And, if you’re going to try AI for doing your taxes, consider setting up some smart safeguards:

1. Review your finished tax return closely. AI makes mistakes and doesn’t catch everything. 
2. Compare to the prior year. Look for large jumps in figures like credits and deductions.
3. Keep good records. Upload clean documents, save receipts and keep track of answers to key questions.