Tax Preparer Ethical Obligations for Using AI Tools in Practice

The Internal Revenue Service (IRS) Office of Professional Responsibility (OPR) recently provided clarity to tax practitioners regarding the ethical considerations and regulatory compliance when integrating Artificial Intelligence (AI) tools into their tax practices. This guidance underscores that established regulations, particularly those outlined in Circular 230 [1], fully extend to the application of AI technologies.

Due Diligence Requirements with AI

Tax professionals employing AI in their work remain fully responsible for the accuracy and veracity of all AI-generated content. Circular 230, Section 10.22 [2], mandates that practitioners exercise due diligence in preparing, approving, and filing documents with the IRS, and in all matters relating to their client representations. This means that AI tools cannot be solely relied upon to perform tasks; every document, calculation, and factual assertion produced by AI must undergo thorough independent review and verification by the practitioner before being presented to a client or submitted to the IRS. A failure to adequately verify AI output, even if it appears plausible, constitutes a breach of due diligence obligations.

Ethical Billing Practices and Fee Transparency

The integration of AI tools can significantly enhance efficiency, potentially reducing the time required for research or document drafting. Under Circular 230, Section 10.27(a) [3], practitioners are prohibited from charging unconscionable fees. If AI substantially reduces the effort involved in a task, billing clients as if the work were performed without AI assistance could be considered an unconscionable fee. The OPR expects tax professionals to disclose their use of AI to clients and to reflect any resulting cost savings in their billing practices.

This shift in efficiency may encourage tax practices to reconsider traditional input-based billing models, such as hourly rates. Moving towards fixed-fee or value-based engagements, where the fee is not directly tied to the time spent but rather to the value delivered, could align better with the benefits of AI. Such models can allow practitioners to maintain fair compensation while embracing efficiency gains, and potentially better ensure compliance with due diligence requirements by fostering a focus on outcome rather than effort.

Competence in AI Utilization

Possessing technological competence has long been a requirement for tax practitioners. The OPR now extends this expectation to include a comprehensive understanding of AI technologies. This encompasses knowledge of how AI systems function, their inherent limitations, and potential failure modes. Practitioners must be able to explain the generative processes of AI tools, identify potential biases in their outputs, and critically assess whether AI-generated results are appropriate for specific IRS matters. A lack of this understanding can indicate a deficiency in the competence required by Circular 230, thereby precluding the responsible deployment of AI in practice.

Firm Procedures for AI Integration

For tax firm owners, establishing robust internal procedures governing AI use is crucial. This includes providing staff with comprehensive training on the risks associated with AI, implementing secure protocols for handling client data, continuously monitoring the accuracy of AI outputs, thoroughly vetting third-party AI tools, and maintaining documentation of all these compliance measures. The OPR emphasizes that ignorance of staff AI usage, such as relying on public tools like ChatGPT for client advice, is not an acceptable defense. Firms must proactively develop and implement standard operating procedures for AI integration.

Verifying Written Advice

When providing written advice that incorporates AI assistance, every factual assertion and legal citation must be independently verified by the tax practitioner. Mindlessly relying on AI output, particularly for complex tax matters with intricate factual patterns or when the AI's underlying logic is unclear, is unacceptable. AI tax research tools should be treated as a starting point for the research process, offering foundational information and relevant authorities, which the practitioner must then critically analyze and validate [4].

Data Protection and Client Confidentiality

Unauthorized disclosure of tax return information can lead to both civil and criminal penalties under Internal Revenue Code (IRC) Sections 6713 [5] and 7216(a) [6]. Uploading sensitive client data to unsecured public AI platforms directly violates these provisions. Practitioners are advised to use only secure, enterprise-approved systems that guarantee robust confidentiality safeguards. The most secure approach, when possible, is to avoid uploading sensitive tax return information into any AI tool. While IRC Section 7216 outlines exceptions for disclosure without consent, the OPR acknowledges that more specific guidance is needed regarding how these exceptions apply to AI tools [7].

Responsible AI Adoption Principles

AI offers significant benefits, such as accelerating research, streamlining document drafting, and identifying relevant authorities. Firms that thoughtfully and ethically integrate AI are likely to gain efficiencies. Key principles for responsible adoption include:

* **Selective Delegation:** Recognizing that certain tasks require human judgment and cannot be entirely outsourced to AI, especially those involving sensitive client data or core tax judgment.

* **Client Transparency:** Clearly disclosing the potential use of AI in engagement letters. If information protected under IRC Section 7216 is shared with an AI tool, explicit, signed client consent is generally required, absent further IRS guidance.

* **Data Discipline:** Ensuring sensitive information resides only within secure, controlled systems, with public platforms strictly prohibited.

* **Training and Supervision:** Equipping staff with proper training on legal, ethical, and technical aspects of AI use, and implementing supervisory oversight to monitor compliance.

* **Documentation:** Maintaining detailed documentation of AI procedures, staff training, and verification processes within the firm's standard operating procedures and information security plan (WISP) [8].

Footnotes

[1] 31 C.F.R. Part 10 (Treasury Department Circular No. 230) — Regulations Governing Practice before the Internal Revenue Service.

[2] 31 C.F.R. § 10.22 — Diligence as to accuracy.

[3] 31 C.F.R. § 10.27(a) — Fees for services.

[4] 31 C.F.R. § 10.37 — Requirements for written advice.

[5] 26 U.S. Code § 6713 — Disclosure or use of information by preparers of returns.

[6] 26 U.S. Code § 7216(a) — General rule regarding disclosures.

[7] IRS.gov — Understanding IRS Enrolled Agent Requirements and Circular 230. https://www.irs.gov/tax-professionals/enrolled-agents/understanding-irs-enrolled-agent-requirements-and-circular-230

[8] National Institute of Standards and Technology (NIST) — SP 800-53, Security and Privacy Controls for Information Systems and Organizations. https://csrc.nist.gov/pubs/sp/800/53/rev5/upd1/final