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AI in tax preparation gets a boost from classification tech

Tax filers and tax collectors are using AI tools to make the process of paying and collecting taxes simpler. The data-rich, complex processes of tax collection are an ideal use case for AI.

Benjamin Franklin famously said there were only two things certain in life: death and taxes. This is a bit of an unusual tax season, however, since tax deadlines have been pushed back due to the global pandemic, giving companies and individuals a few more months to deal with personal and corporate finances.

 It's been challenging for federal, state and local governments as well, as they deal with remote workforces and challenges in data collection in a newly distributed and remote world. To address these challenges, tax filers and tax collectors are using machine learning and AI in tax preparation tasks to help do their jobs more effectively and efficiently.

AI in tax preparation makes processes more manageable

Individual and corporate tax filers have a wide range of responsibilities and activities they need to do to get their documents in shape for filing. From the collection of receipts and allocation of expenses to aggregation of documents from multiple sources, tax filing and preparation mostly consists of organizing, collecting and submitting documents as well as extracting key bits of information from those documents for relevant sections. AI and machine learning have particularly strong capabilities with regards to document and text extraction and classification.

Even the average tax filer is seeing benefit from AI-enabled tax preparation. Image and object recognition capabilities are finding their way into personal and business finance tools, extracting information from receipts and categorizing documents. Machine learning-powered document classification systems are able to distinguish between invoices and receipts and automatically extract information from standard forms such as 1099 and W-2 documents with little need for humans to rekey that information.

AI-enabled personal and business finance systems are digging deeper into financial data, identifying areas where tax deductions might be relevant and providing insight and analysis in financial information. Machine learning systems are able to spot patterns in individual filer documentation to provide financial forecasts and can mine data to identify areas where individuals and businesses can save money on taxes. By using AI in tax preparation systems, businesses can learn from the tax filings of similar companies and identify areas where companies can optimize their returns.

Businesses are also making increasing use of automation tools to help extract information from various business systems and enterprise information sources, collecting information necessary to make accurate filings as well as speeding up the processing of necessary tax documentation. Much of the work of tax filing and preparation is quite repetitive and laborious, and increasingly it's making less sense for humans to perform those tasks. Fortunately, process automation is well-suited to these laborious tasks. Automation tools can easily move information into and out of relevant systems.

AI helping to manage finances

AI is also helping individuals and businesses outside the tax filing season by showing users how to optimize their finances before tax deadlines approach. One of the biggest ways AI is being used in the world of personal finance is to help clients make informed decisions. AI-enabled systems are able to look into portfolios, accounts and other available information and provide suggestions on ways to structure those finances for optimal returns. Machines are able to aggregate and pull data from more sources quicker than their human counterparts. Suggestions provided by AI systems are thus potentially broader, more informed, faster and cheaper than plans developed by human accountants.

Another area where AI makes a big difference is in financial advising. Many people are unable to afford financial advisors. AI helps to bring personalized financial advice to the masses. Previously, those who could not afford advice would have to educate themselves by reading articles and watching trends, and then try to come up with their own plans. However, now AI-enabled assistants are able to provide personalized guidance and insights into how to better save, manage and spend money to optimize for particular savings goals or minimize tax exposure.

AI providing an extra pair of hands and oversight

AI is providing significant benefit for governments and tax collectors, too. In particular, the Internal Revenue Service (IRS) has been applying AI in tax processing to accelerate the process, helping to make the agency's systems more efficient and keep a watchful eye for potential fraud and areas of concern.

The IRS is in the middle of a six-year IT modernization effort, during which time the agency will spend over $300 million to advance its systems. However, the IRS is also facing a large number of employees retiring and departing the agency. While this budget allows the IRS to grow to over 12,000 employees, it is increasingly finding it needs to do just as much work or more with fewer resources than in years past.

Fortunately, the IRS is seeing benefit from using AI, and has been vocal about this. IRS Commissioner Chuck Rettig has said that the agency is successfully using AI to spot high-income households who might not be accurately filing tax returns. According to a report in the Wall Street Journal, the IRS' criminal investigations unit is using Palantir Technologies to identify potential audit opportunities. AI is capable of monitoring transactions for a variety of factors such as amounts, trends, locations, frequency and similar categories. In monitoring this information, it is able to spot patterns and detect unusual practices to identify fraud.

The IRS is also applying AI in applications for advanced analytics to give the agency more insight and guidance into taxpayer patterns and behaviors. The agency is growing its data science and data analytics skill base and applying it to a range of challenge areas. Other uses of AI in the IRS include the use of chatbots and voice assistants to help tax preparers as well as the use of process automation technology to assist with a range of activities from data handling to procurement and beyond.

While there's no doubt that AI is the last thing you might have in mind as you file your taxes this year, you should know that behind the scenes, AI is hard at work looking at your data and making the process that much more effective and efficient.

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