Legacy Law Blog

One of the most highly anticipated technological advancements since the personal computer has been the rise of Artificial Intelligence (AI). Although AI research dates back decades, AI chatbots that anyone can use became widely available only a few years ago.

Since then, the frequency of their use and how powerful they have become when asked to do anything from answering simple questions to generating lifelike images or research papers (to name just a few) has exceeded many expectations for such a young technology.

Artificial intelligence is changing how people find and use information, including tax information. For individuals and business owners, AI can make unfamiliar concepts easier to understand, help organize records and prepare questions for a tax adviser, and offer solutions for how to address issues. Used thoughtfully, it can save time and make tax discussions more productive.

That said, even a game-changing technology like AI has its limitations when it comes to navigating tax issues with the IRS or a state taxing authority.

Generating an answer using AI is not the same as providing sound tax advice. AI can overlook critical facts or solutions, misinterpret legal authorities and present an incorrect conclusion with remarkable confidence. The Taxpayer Advocate Service, an independent organization within the IRS, has cautioned taxpayers against relying solely on AI-generated tax advice because of concerns about its accuracy for these exact reasons.

The most useful way to use AI to address tax issues is as a tool for preparation and general education, not as a substitute for sound professional judgment.

Where AI can be Useful

One of AI’s strengths is making complicated subjects more approachable and finding answers to questions quickly. A taxpayer encountering terms such as “basis,” “depreciation” or “estimated tax payments” can ask for a plain-English explanation before speaking with an adviser. General-purpose chatbots can help explain unfamiliar terminology and draft questions, provided their responses are treated as a starting point rather than a verified conclusion.

For example, someone considering renting out a former residence might ask AI to prepare questions for a tax planning meeting. A business owner could ask for a preliminary checklist of records to assemble before discussing year-end planning. An individual who receives a notice from the IRS can ask for a general explanation of that type of notice and the typical options for responding, without uploading the notice or sharing personal identifying information. These requests use AI to improve preparation without asking it to resolve the taxpayer’s legal obligations.

AI can also assist with organizing information. Depending on the tool and its security protections, it may help summarize documents, extract data or suggest expense categories. Those capabilities can reduce administrative work, but they still require review. A tool’s ability to identify an amount on an invoice does not establish that the expense is deductible or determine its proper tax treatment.

This distinction is important: AI can help you organize the information needed for advice without being qualified to supply the final advice itself.

Why a Confident Answer can Still be Wrong

AI’s limitations are particularly important in tax matters because a plausible answer may be wrong in ways that are not obvious to someone without tax training or experience.

An AI response may apply a rule from the wrong tax year, overlook a recent change to the tax code or confuse federal law with state law. Many AI tools are trained on information that stops at a certain date, so they may not reflect new legislation, inflation adjustments or recent IRS guidance unless they search current sources. AI may also supply a citation that does not exist or rely on a real source that does not support its conclusion. Asking AI for sources is useful, but a response with citations is not necessarily a reliable response. The underlying sources still need to be checked.

Tax analysis also depends heavily on facts. Ownership, entity type, residency, timing, prior transactions and elections can affect the answer. The inclusion or omission of a fact can drastically alter an answer or overlook a solution. AI may provide a general explanation without recognizing that it lacks information necessary to apply the law to the taxpayer’s specific circumstances.

This is why asking, “Can my business deduct this payment?” can be less useful than asking, “What information would a tax adviser need to determine the proper treatment of this payment?” The first question invites a conclusion that may rest on unspoken assumptions. The second helps identify the work needed before reaching a conclusion.

Good tax counsel does more than answer the question presented. Counsel helps determine whether it is the right question, what facts are missing and whether the proposed approach creates other problems beyond the initial questions.

Protecting Sensitive Information

Tax records contain information that should not be casually uploaded to an AI platform. Returns, financial statements, payroll records and transaction documents may contain Social Security numbers, bank account information, employee data and confidential business details. Depending on the provider and its settings, information uploaded to an AI tool may be stored on the provider’s systems after the conversation ends, reviewed by the provider’s personnel, used to train future models or exposed in a data breach. Once submitted, you may have limited control over where that information goes.

Before providing an AI tool with your sensitive information, review how the AI provider stores data, who may access it, whether it may be used for training and what contractual protections apply. A paid subscription or a product labeled for business use should not be treated as a substitute for reviewing the actual terms and safeguards to ensure that your sensitive information is not shared with others. Professional guidance on AI emphasizes understanding those protections before submitting any confidential information.

Likewise, asking AI a legal question does not, by itself, create an attorney-client relationship or make the AI exchange privileged. Conversations with an AI tool may be obtainable by the IRS through a summons, or by the Department of Justice or another party in litigation, much like other records a taxpayer creates. Taxpayers should not assume that a conversation with AI has the same protections as a confidential discussion with their lawyer.

Note that communications with a CPA or other federally authorized tax practitioner receive only limited protection under federal law, which generally does not apply in criminal tax matters or to state tax authorities. Courts are addressing how AI use affects attorney-client privilege and work-product protection, and the analysis can depend on the platform, counsel’s involvement and the circumstances of disclosure.

“AI Told me to” Does not Transfer Responsibility

Taxpayers remain accountable for what appears on their tax returns and for their correspondence with the IRS. The IRS states that taxpayers are ultimately responsible for the accuracy of reported items even when a paid preparer prepares their income tax or other return. Using AI does not eliminate the need to review the return and verify that the numbers included are accurate and complete.

Taxpayers should also not assume that relying on an AI answer will excuse an error. Relief from certain IRS accuracy-related penalties may depend on reasonable cause and good faith, but that relief is not automatic, and reliance on an AI tool alone is unlikely to satisfy that standard. Taxpayers ultimately remain responsible for satisfying their filing and payment obligations and for their communications with the IRS.

Professional advice is not an automatic shield against penalties either. Penalty relief may be available for good faith reliance on a competent adviser who has the knowledge, training and experience to provide tax advice. The adviser’s qualifications, the information provided and the reasonableness of the taxpayer’s reliance can matter. A careful advisory process is therefore important. Supplying complete facts, obtaining advice responsive to the actual issue and maintaining appropriate records all help distinguish informed decision making from unquestioning reliance on an answer. This kind of informed decision making is a specific weakness of AI because its answers are limited by the information provided by the taxpayer and by the tool’s access to, and understanding of, the Internal Revenue Code, U.S. Department of Treasury regulations and IRS guidance and procedures.

When Professional Judgment Matters Most

The need for professional review increases when a taxpayer moves from learning about an issue to acting on it. Reading an explanation of business structures is different from choosing an entity’s tax treatment. Preparing questions about selling a business is different from signing a purchase agreement based on an AI-generated assessment of the tax consequences. Learning that you have a tax balance is different from knowing which option would be best to address that balance, such as full payment, an installment agreement or an offer in compromise.

Business acquisitions and sales, ownership changes, significant deductions or credits, multistate activities and international reporting are examples of matters that warrant individualized analysis. The same is true when responding to an audit, proposed adjustment or collection notice. AI can assist with preliminary research and document review in complex tax work, but those functions do not eliminate the need for human validation and judgment.

Tax counsel’s value lies in connecting the applicable law to a developed factual record, evaluating uncertainty and helping the taxpayer implement a defensible approach. Where a matter involves a dispute or sensitive legal issues, counsel can also help manage confidentiality and applicable legal protections while explaining their limits.

A Better Way to Use AI for Tax Questions

A sensible approach to using AI begins with a general, anonymized question that identifies the relevant tax year and jurisdiction, complemented by general facts. Rather than requesting a definitive answer, ask the tool to explain the issue, identifying additional facts that might change the analysis and point to sources for verification. Compare the response against official resources, such as IRS.gov, IRS publications and your state tax agency’s website.

Use the AI response to prepare questions and organize records for a professional discussion, not as permission to take a tax position, or worse, as confirmation that the tax position is correct and complete. This approach preserves AI’s educational value while recognizing its limitations.

Before filing a return, making an election, completing a significant transaction or responding to a taxing authority, obtain appropriate professional review. Don’t just rely on AI alone to determine the best course of action.

The objective is not to avoid technology. It is to use technology as a tool in a way that allows you to become educated on your specific tax questions, to improve the quality of your interactions with the IRS and tax counsel, and to lead to better outcomes.

AI can help taxpayers arrive at a meeting with better questions. Good tax counsel helps them determine which answers they can rely on and navigate the process effectively.