4 AI-Generated Tax Errors To Keep an Eye Out for — and How Much They Could Cost You
Written by
Emily Fowler
Edited by
Rebekah Evans
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Artificial intelligence (AI) is showing up everywhere during tax season, from chat-based assistants to AI-powered tax tools. According to a recent tax filing survey by Invoice Home, 43% of respondents would rather trust AI than hire a professional to help them file.
While using AI as a reference can help, letting it do too much of the heavy lifting can be an expensive mistake. Here are four potential errors to watch for and what they could end up costing.
Wrong Deductions or Credits
- Potential cost: Accuracy-related penalty
If AI tells someone they qualify for a certain deduction or credit when they don’t and they end up claiming incorrectly, they’re likely to be hit with a penalty. An accuracy-related penalty is 20% of underpayment plus interest, per the IRS. For example, claiming a $1,500 personal expense incorrectly as a business deduction could trigger a $300 accuracy-related penalty plus interest and the $1,500 would also have to be repaid.
Underreported Income
- Potential cost: Accuracy-related penalty
If AI mischaracterizes or misses out a part of someone’s income, for example $2,000 earned from a side gig or crypto trades, it might end up not being reported. Then, when the IRS compares the reported income to 1099s or W-2s, that missed $2,000 could lead to a $400 penalty plus interest and also increase the chance of an audit.
Misapplied Tax Law
- Potential cost: Accuracy-related penalty
AI can misread complex rules, including multi-state taxes or recent law changes, which can lead to underpayment or incorrect refunds. Some AI tools may even generate answers that aren’t based on reality at all.
Miscalculated Estimated Taxes
- Potential cost: Interest and underpayment penalties on each missed quarter
Estimated tax penalties apply when quarterly payments are too low or paid late. The IRS doesn’t charge a flat fine. Instead, it applies interest on the unpaid amount, per the IRS — calculated separately for each quarter. AI has the potential to miscalculate, particularly for anyone whose income fluctuates and while safe harbor rules mean small underpayments may avoid penalties, larger underpayments could end up costing the taxpayer.
Other Costs To Keep in Mind
When it comes to potential IRS penalties, these type of mistakes create extra work on the back end. Business owners and individual taxpayers can end up spending extra hours (or paying a professional for extra hours) to undo problems that never should’ve happened.
Even government AI tools aren’t foolproof. Professors Joshua Blank and Leigh Osofsky told Forbes that IRS tools like the Interactive Tax Assistant can oversimplify complex rules or miss nuances, which can still lead to mistakes and costly penalties.
AI tools can be useful in parts of the tax process, but relying on them completely and not double-checking the output can be costly. Returns should always be reviewed carefully, as small errors can quickly become expensive missteps.
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