AI and the Regulation of Tax Return Preparers

Abstract

Tax return preparers play a pivotal role for millions of taxpayers, and their number ranges in the hundreds of thousands. Despite preparers’ importance in the tax return submission process and their numerical size, they are largely unregulated. Because of this lack of oversight, a significant number of tax return preparers put their own financial interests and those of their clients ahead of the government’s financial interests.

In the past, there have been calls for increased regulatory oversight to keep wayward practitioners’ actions in check. Therefore, a decade and a half ago, Congress, in conjunction with the Treasury Department, mandated that every paid tax return preparer secure a Preparer Tax Identification Number (PTIN) and affix it to the face of the tax returns that they prepare.

Enter artificial intelligence (AI)—with its unparalleled ability to process and analyze an immense amount of data—combined with electronic tax return filings. With immediate access to PTINs and other information or characteristics associated with such returns, AI is ideally situated to identify tax return preparers who are derelict in their professional duties. Once identified, the Internal Revenue Service can hold these practitioners accountable for their mistakes and misdeeds.

Unlike the prior academic papers that have championed regulatory oversight well beyond PTIN registration (e.g., mandatory annual education courses and exams), this analysis stands apart. Instead, it recognizes AI’s power and what it can accomplish if properly brought to bear to the problem of unregulated tax return preparers. Seizing this opportunity would most likely result in increased tax compliance, the collection of billions more in revenue without raising taxes, and a narrowing of the tax gap (i.e., the difference between what taxpayers pay in tax and what they owe). Furthermore, the foregoing may be accomplished without adding needless administrative burdens.