Application of AI in Finance and Tax
Over the past couple of years, the IRS has received various complaints about low audit rates on wealthy taxpayers. Many individuals believe that the rich get away with evading taxes because they don't face the same scrutiny as others. In response to these complaints, the IRS on Friday changed plans to focus on higher-end enforcement. The IRS will be using Artificial Intelligence (AI) to examine the tax statements of large partnerships such as such as hedge funds, real estate investors, and law firms. In addition to this, the IRS has also promised to not increase audits for individuals and households who earn less than $400,000 per year. The IRS will also ensure that individuals with earned income tax credits will not have to undergo any additional audits.
Robert Kovacev, who is a tax controversy partner at law firm Miller & Chevalier, states that currently, individuals and corporations who file taxes, play the "audit lottery," where the frequency with which certain groups of people face scrutiny for their audits depends on chance or luck. In most cases, wealthy individuals face the least scrutiny.
However, according to Kovacev, this will change when the IRS implements AI technology to verify taxes. The tax return data will constantly be interrogated by the AI algorithm, to check for discrepancies and potential tax evasion/fraud. Kovacev states that the change won't be immediate but within the next three to five years, there will be a noticeable increase in audits of large partnerships, large businesses, and high-net-worth families.
In addition to its applications towards tax, AI is also being used in various domains of finance, such as personal finance, consumer finance, and corporate finance. Since people want more financial independence today than ever before, companies will be offering personal chatbots that offer financial advice tailored to an individual's needs 24/7. An example of this would be Capital One's chatbot, ENO, which offers personalized financial advice to individuals who would like to manage their own money. In consumer finance, JP Morgan Chase utilizes AI technology to process various transactions and then determine whether it is fraudulent or not. In the world of corporate finance, AI is being used to help with fraud detection and spot any suspicious activity. US Bank is using AI for corporate finance. They are using deep learning to weed out individuals who are committing fraud such as money laundering.
I am definitely excited about this and would love to see AI being used in various domains of tax and finance. For example, during my internship at PwC, I helped review the K-1 statements for another corporation. While the process wasn't complicated or difficult to understand, it was quite tedious to identify the errors in the K-1 statements and then update them in the system. Having an AI chatbot that would automatically identify the errors in the K-1 statements, and then provide me with real-time data, so I can update the correct information in the system. That would fast-track the process and leave employees with more time to focus on other responsibilities. I believe AI technology could have also helped me during my finance internship at Druva when I was leading the accrual process for two months. Similar to my internship at PwC, the accrual process wasn't difficult or complex by nature, but the process was quite tedious and time-consuming. Having an AI chatbot that would help me identify the discrepancies in the accrual statements would have fast-tracked the process significantly, and allowed me to allocate more time to other tasks, such as helping the BI (Business Intelligence) team fix their TCO (Total Cost of Ownership) calculator. I was able to do the latter but could have spent more time with the BI team if I had AI technology to help me lead the accrual process.
Overall, the future for AI in tax and finance seems bright, and I am excited to see how AI will be used in these fields in the future.
References:
https://www.insiderintelligence.com/insights/ai-in-finance/
https://www.cnbc.com/2023/09/12/irs-plan-to-use-ai-may-affect-wealthy-taxpayers-heres-how.html#:~:text=The%20IRS%20is%20launching%20plans,years%2C%20according%20to%20one%20expert.