By Rick Meyer, CPA, MBA, MST

This blog is a reprint of a previously published post by other state societies.

Do you remember HAL 9000, or simply HAL? He was the iconic artificial general intelligence character in the 1968 film, 2001: A Space Odyssey. For young folks, you might think of him as the predecessor to R2-D2, C-3PO, or any other of your favorite Hollywood AI robots. Who would have thought that fiction would find its way to reality in my lifetime?

With the rising popularity of artificial general intelligence (AGI) and its potential for business transformation, there's a significant push for CPAs to leverage AI features to save time and boost profitability. While it's certainly feasible and beneficial to use AI for enhancing operational efficiency and automating routine tasks, claiming that AI can handle complex accounting and tax-related tasks, such as preparing a detailed study, is quite a stretch. Yet, I see numerous "pop-up" shops emerging that boldly assert that AI can handle 80% or more of a research and development (R&D) credit study.

Ah…yes. Remember those "pop-up" tax providers during the COVID years? They promised clients thousands in employee retention credit (ERC) refunds but lacked technical and legal proficiency, leading to trouble with the IRS and repayments with interest and penalties.

Well, the pop-ups are back with their slick marketing and grand promises. Your clients might be tempted, but this time words of caution from their CPAs will go a long way in saving them from a similar fate.

Complex Tax Matters with AI: Why Caution Is Crucial

I recently wrote an article with practical steps CPAs can take to identify AI opportunities. After interviewing 200 CPA firms nationwide, we identified common, routine, and nontechnical tasks in their practice for which AI could help.

However, an R&D credit project is anything but common, routine, and nontechnical. Let me give you a few analogies:

• Would you trust AI to do over 80% of a complex brain surgery on you with an occasional “look-see” from the human brain surgeon?
• Would you trust AI to do over 80% of an estate planning project among families with divergent interests?
• Would you trust AI to do over 80% of your part in an argument with your spouse or significant other over a heated issue? Preposterous!

The simple fact is that when it comes to complex tax matters such as R&D credits and ERC, AI does not have the necessary human judgement required. For example, in determining whether a taxpayer qualifies for the R&D credit, AI cannot interview employees, determine statistical sampling models, perform on-site visits, or competently gather the necessary complex legal analysis.

Don’t take my word for it. Even the IRS’s independent Taxpayer Advocate recently came out with a sober caution to taxpayers and tax advisers who rely on AI. The IRS’s Taxpayer Advocate’s statement declares:

“Despite efforts to ensure accuracy, these AI assistants may encounter difficulties interpreting complex tax laws correctly or considering unique circumstances that could impact a taxpayer’s return. As a result, taxpayers should not solely rely on AI generated tax advice.”

This statement cited an informal review by The Washington Post, “Don’t Let AI Help You Do Your Taxes,” from March 4, 2024. It highlighted that they “found that two of the leading tax preparation companies’ chatbots provide inaccurate or irrelevant responses up to 50% of the time when initially asked 16 complex tax questions.” Yikes!

Yet, pop-up shops would have you believe that preparing an R&D study is as simple as ordering a Happy Meal.

Scope of Preparing an R&D Credit Study

I understand that pop-up R&D shops employ software engineers with computer science degrees who can write algorithms to capture technical information, gather facts, and decide which projects qualify for a credit. But do these individuals also hold degrees in law, tax, mechanical engineering, electrical engineering, biological sciences, and all the other fields necessary to collaborate and analyze the facts and make informed decisions on qualifying R&D projects? Are they well-versed in every aspect of the tax code, treasury regulations, and case law needed to defend their studies?

For algorithm programmers to be truly effective, they would need over 75 years' worth of college degrees in the specific STEM fields before they could write their first technical R&D algorithm. And let's not forget how quickly the pop-ups abandoned their clients the last time the IRS came after them. Who are they kidding?

Is there any place to use AI in an R&D study? Sure. AI works for many common and routine items and repeatable tasks in order to streamline the process for clients, remove duplicate content, and flag basic errors in the data.

As for using AI to do over 80% of an R&D study? No way.

Where Does CPA’s Role and Responsibility Lie?

There is no denying that AI is going to impact our lives and work in major ways in the coming years. It has already begun. Even the IRS has started using AI to automate internal processes. Yet, no one from the agency is claiming that it can prepare a complex tax study. You know what else the agency is using AI for? Identifying fraudulent claims and tax evaders.

After the ERC turbulence, there is no question that the IRS is highly aware of these problems with AI-generated credits and tax returns, especially for complex matters such as preparing studies to claim tax incentives. We expect the IRS will focus its limited audit resources on AI-generated credits and tax returns.

Before my gloomy predictions come true, the first voice of reason clients need to hear must come from us, CPAs and tax advisers. We need to be aware of the limits of AI, and given that our clients trust us more than anyone else, it is we who will ultimately be responsible for signing the tax return.

If you remember 2001’s HAL, you’ll also remember it started killing off the astronaut crew due to a faulty algorithm written into its logic by a human. Certainly, there will be no physical harm by using a “pop-up” R&D provider using AI to do over 80% of an R&D study. However, you and your client could be financially killed on an IRS review.

Rick Meyer, CPA, MBA, MST, is a long-time member of the Illinois CPA Society and has served on various tax committees over the past 45+ years. He is a director for alliantgroup, a national firm that works with businesses and their CPAs to identify powerful government-sponsored tax credits and incentives, talent solutions, and emerging technologies like generative AI. He can be contacted at rick.meyer@alliantgroup.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}