IRS outlines AI risks, Circular 230 duties for tax practitioners

The IRS Office of Professional Responsibility (OPR) issued guidance outlining how existing Treasury Circular 230 rules apply to tax practitioners’ use of artificial intelligence (AI), emphasizing that long-standing duties such as due diligence, competence, and confidentiality remain unchanged.

The overarching message, the agency said in a bulletin posted Wednesday, is that AI should augment — not replace — professional judgment.

“Technology serves as a powerful tool, not a substitute for professional judgment,” the OPR bulletin said. “Final decisions must always rest with qualified professionals who understand the complexities of tax law and ethical standards.”

The OPR enforces compliance of Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), and can discipline practitioners for violations. Earlier in June, the IRS said it would merge OPR with the Return Preparer Office, which administers the preparer tax identification number program, to form the Tax Professional Management Office.

Generative AI offers benefits such as cost savings and rapid data analysis, along with potential government uses including fraud detection and audit risk assessment, the bulletin said. But it also stressed that the technology also carries well-documented risks, including fabricated outputs, bias, and lack of transparency.

Final decisions “must always rest with qualified professionals who understand the complexities of tax law and ethical standards,” the bulletin said. “Practitioners must remain vigilant in reviewing what is produced by AI, validating its factual assertions and citations, and handling sensitive client data safely and securely in accordance with both federal and state regulations.”

Emphasis on due diligence and oversight

Practitioners maintain full responsibility for any work produced with AI assistance, the OPR said.  They must exercise due diligence in preparing returns and other submissions, including verifying the accuracy of facts, citations, and calculations that AI produces, it said.

AI-generated content is a starting point, not a finished product, and practitioners cannot rely solely on it, the OPR said. “Human scrutiny and editing are essential,” it said.

Practitioners must understand both the tax law and the AI tools they use, including how systems generate content and where errors or bias may arise, the bulletin said.

“Lack of technological competence could lead to improper advice or flawed filings,” the OPR said.

Billing, written advice, and firm procedures

The OPR also addressed fees for AI-assisted tasks, warning that charging for time not actually spent due to AI efficiencies could raise concerns about “an unconscionable fee.” Cost savings from AI should be reflected in client billing, and practitioners should disclose AI use as appropriate and “fairly credit to the client’s account any cost reductions,” the bulletin said.

Firm leaders also face obligations to implement procedures ensuring compliance with Circular 230 in the AI space. Firms must adopt policies covering staff training, secure data handling, accuracy monitoring, and vetting of third-party AI tools, with documentation demonstrating adherence to the rule, the OPR said.

Privacy risks and potential penalties

The bulletin underscored risks surrounding taxpayer data, pointing to Code provisions that impose civil and criminal penalties for unauthorized disclosure of tax return information. Generative AI platforms, particularly those that are public or unsecured, may expose confidential data.

“Practitioners must strictly handle all client data using only secure, enterprise-approved AI,” the agency said, warning that willful mishandling of information could lead to disciplinary action under Circular 230.

Lessons from legal sanctions

The bulletin pointed to real-world consequences of improper AI use as courts have increasingly sanctioned lawyers for filings containing fabricated citations and other AI-generated errors. Penalties have included financial sanctions, public censure, and removal from cases.

While most cases have involved attorneys, similar risks apply to other tax professionals, the bulletin said. It cited an example in which a report prepared for the Australian government by an accounting firm included invented quotes and incorrect citations, prompting a partial fee refund.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.