Why Smart Taxation Needs Smart Machine Learning

Taxes do a lot of things. Used wisely, they can make life safer, healthier and worthwhile. Used unwisely, they can spark rebellions like the one we celebrate every July 4th. They stick around for a pretty long time, from the moment you’re old enough to work until the end of your earthly existence in the form of an estate or inheritance tax. They can also be so dang complicated that you need tax lawyers, tax accountants and tax calculators just to get your numbers right. Come April, taxes can really stress you out.

Well, maybe not if you have AI on your side. Artificial intelligence and machine learning have revolutionized the fields of accounting and finance for years and are now changing how Americans prepare their tax returns. Market leaders in tax preparation software have kicked off the race to integrate and maximize the benefits of AI in their services.

For consumers, these benefits generally fall into three categories: those that improve the accuracy and completeness of tax declarations, those that speed up the process, and those that maximize the amount of refund taxpayers can claim.

Too taxing for humans

In early 2017, H&R Block partnered with IBM Watson to merge the expertise of thousands of human tax professionals with the jaw-dropping power of a computer system equipped with natural language processing (NLP), automated reasoning, context cognition, and machine learning abilities that run on a cluster of superservers and can process more than a million books per second. Clearly, that’s more than a match for the measly 74,000-page text of the U.S. federal tax code.

Meanwhile, business and financial software company Intuit infused tax preparation software TurboTax with generous doses of AI, which reportedly reduce the time it takes to complete your return by up to 40 percent. TurboTax also introduced several features driven by machine learning algorithms.

TurboTax’s ExpenseFinder automatically retrieves all your bank transactions in a fiscal year to find, organize and classify deductible business expenses. This time-saving feature targets the increasing number of self-employed service providers who are projected to clock in at around 7.6 million Americans by 2020. Without functionalities like ExpenseFinder, self-employed taxpayers manually download bank transactions and highlight items they think are business expenses, a tedious process that could easily take hours.

In contrast, doing the same task with ExpenseFinder takes only a few breezy minutes. Because ExpenseFinder meticulously combs through every business deduction — including ones you may have not thought about or know you can claim — the likelihood of missing an item is dramatically lower compared to sorting out your expenses manually. According to Intuit, they detect up to $4,300 in business expenses on average.

ExplainWhy is another powerful built-in feature. Driven by the Knowledge Engine — a rules-based AI that holds voluminous information on US tax requirements and guidance — ExplainWhy sets a high standard of compliance by discussing the correlations, implications and logic behind each tax rule in an easy-to-understand natural language.

Beyond giving insight on demand, the engine also provides real-time, proactive, and relevant reminders as new information about a taxpayer is revealed. For example, a taxpayer who discloses a dependent will automatically be prompted to review prior entries since the new information likely influences other items and might modify the current refundable amount.  

Intuit also explores tax resolution through other channels. In an interview with TOPBOTS, Vice President of Product Development Kyle Ryan described TurboTax’s entry into the Internet of Things (IoT): “As far as the AI side goes, one of things I want to share right out of the gate is that we have enabled TurboTax as a skill on Amazon’s Alexa platform, taking our AI capability into voice and learn about consumers’ behavior and their interests …”

“So we launched the skill and the first command you can give is ‘Where’s my refund?’ which is one of the most common questions we get every year, both from our self-help [service] as well as our care agents. It is the Number 1 question the IRS gets as well.”

According to Ryan, Intuit is also one of first companies to enable security through voice on Alexa. Once you enable the TurboTax skill, you can set up the link to your Intuit account and then provide the standard four-digit security pin through voice. You’ll then need to voice out the pin each time you invoke the TurboTax skill. Ryan admitted to some weak points in these interactions but added that they’re having conversations with Google and Amazon on how to further secure sensitive transactions with conversational platforms like Alexa.

Another player in the tax prep industry taps into the widely popular text messaging channel via a chatbot. AskMyUncleSam uses natural language processing to interact with Facebook Messenger and Slack users who want to know about tax credits and other financial information they’re not aware of. Like its two bigger competitors, AskMyUncleSam aims to simplify taxation and promises to save taxpayers’ time and money while helping them prepare returns that yield the highest amount of refund.   

When the (tax) burden becomes unbearable

Everyone knows the government needs tax revenues to provide security, healthcare and other basic services. That’s enough good reason to compel the vast majority of American income earners to remain good taxpayers.

But Americans also deserve to keep in their pockets money they’re legally entitled to. Hence, the frantic hunt for exemptions, allowances, breaks, credits and deductions will persist as long as taxes continue to slash our income. But 80,000 pages of tax rules, regulations and updates can wear down the human brain. Good thing computer intelligence doesn’t get bored sifting through pages and pages of onerous legal code.

Perhaps we’ll have another tax-related revolution, this time sparked by AI.