Transforming Tax with AI: Opportunities and Challenges for Firms and CPAs

Welcome to the Accounting for Innovation podcast where we explore cutting edge strategies and insights into the world of accounting and finance. Presented by Decimal and the Radical cba, each episode dives deep into industry trends. Whether you're a seasoned professional or a budding entrepreneur, join us as we unpack key concepts and share practical tips to drive success.

Welcome to today's episode of Accounting for Innovation with your co hosts, myself, Matt Tate and Jody Paidar. Today I am excited because I have very little contextual information to be able to help this discussion, but Jody is an expert. So today we're going to talk about AI for tax because to me and our teams are doing this at Decimal, AI is reducing the burden of tax season prep. It's enabling more strategic planning, it's making the work easier. And one of the craziest things I've always thought about the profession is in other jobs, people measure your time by how many years you've been at a company. In an accounting firm, it's how many tax seasons. So Jodi, how are we going to use AI to make that less impactful?

Oh, I love AI and tax. So to give people a little bit of background if they haven't, you know, been around me for a while is my last full time position was with April Tax Software. And April Tax Software built tax software to compete with Turbo Tax. So on the consumer side, I was employee number one and I worked hand in hand with the engineers to use AI to build tax software from scratch. Now the way we used AI is we used to the language models to read the forms instructions and to code forms faster and we were able to get from nothing or 00 federal and no states to have complete federal coverage. Now granted, there was a limited form set to it in three years, which is unheard of, right. When you think of like, and we had, I don't want to say a handful of engineers because we did have a team, but we had nowhere near the team that any of the other legacy providers have to develop software. So that's how fast the compliance based software is going now and using AI to develop it. And now, and that was even before like kind of chatgpt, because that began in the end of 2021 and the models are that much smarter now. So but now when you think about it in the professional side, because we built it in the consumer side, professionals are always a little bit more, you know, picky about how the software works. Now when you look at it on the professional side, I can honestly say, guess what? It was done on the consumer side, it can be done on the professional side. So it's now a question of who and how fast are they going to get there. And when you look at all the pieces of tax software, it's not just the filing side, which is what I did at April, it's the gathering of documents, it's the kind of all in the, I'll call it the pre tax work. In a cas they call it pre accounting which is all the bookkeeping and the receipts. So how do you get all that pre tax work done? And there are already tools on the market that are starting to kind of redefine what that organizer is like an organizer on steroids. Right. And I think that's what's exciting because that's like the first step and then once you get all that data in and again we're going unstructured to structured data now you can populate tax forms fairly easily and you can get to filing. And so I would guess in the next few years we will have complete software that will be able to file using AI significantly. And you know, in the professional side there's like black or who. Nobody really knows what they do but they raised like I think $60 million or some crazy amount and yet nobody has really seen them their software work yet. But I think that's interesting. So I think there's an opportunity there. I also think that I've had, well I think I know I've had three additional seed founded startups come to me directly asking for help with tax software. Also Iwin just acquired taxa and they're in, they're kind of exploring the space. So that's like five that I can say today that are going to get there now whether they get there in one year or five years, I don't know. But it's coming and it's coming quick. And then you again you have the kind of, the pre tax softwares that are kind of on the cusp who are like starting it as well. And and then there's the, the planning software. Right. So we didn't even talk about like tax planning software. Right. So I think true prep AI, you have other tax planning softwares that are like they're building to help us do tax planning, which I actually think is a little bit easier even than compliance to use AI to do it. So I agree. Yeah, the opportunity. And then last but not least, we got research, right. And we have Blue Jay who is like killing it on the tax research side. They're like everywhere now and they're in all the states and they really make tax research super simple. So tax is actually, I think, one of the easier things to do with AI because it's based in language, because it's law and it's language, and it's. It's yes or no. There's less gray in it. I mean, there's still gray, but there's. I'll say there's a little bit less gray, but anyways, I'm excited about it. Matt, what's your take on it? That was a lot.

Oh, no, I agree. Not that it was a lot. It was a lot, but it was great. I think that it's awesome. I mean, what I was talking to my team the other day and I said, you know what my ideal is? We get a last year's tax return from a client, and then we just watch software reach out to them and tell them exactly what we need from them, exactly what states they're going to file in. It follows up with them in a good mannered, humanistic way. It compiles all the information, it fills out the forms, and you guys are just advising them on a few things. So that, to me, is the most amazing outcome for where I think we're going to get to pretty quickly. And the reality is, I agree with you, it's easier. I think you're going to see AI adopted faster through at least SMB tax than you will in CAS and bookkeeping, because it is so legalistic. In CAS and bookkeeping, it's a very flexible kind of program that you can do. Everybody's different. You have different charts of accounts, desires, wants, businesses, industries, but kind of taxes, tax. And it's pretty well regulated. You do have some gray areas. And, you know, I think those of us that pay taxes should always have a rule of trying to legally pay as few as possible. But I think as you really look at it, there's a lot of. Of opportunity out there. And, you know, the tech stack that we look at is you want the Blue Jays for research, and we use taxdome and, and its capabilities, and we're even looking at how do we maybe replace that with something newer and. And then your filing side. I think there's a lot of opportunity out there.

Well, I think it's exciting. I think the hard part is, is the legacy vendors have owned the space for so long and they are.

You.

Know, not so accepting of new players in the market. And I think the hard part about it is too, is that CPAs have to adopt and they have to kind of test it. And that's where that's the hard part. Because if these companies are VC backed and funded, they wanna show adoption. And if CPAs don't adopt the new software and they don't try it out because tax season is so busy and they don't have time for it and all of these things, then what could happen? And I'm gonna play like devil's advocate here, right? What happens if these companies get all this money to change things and nothing changes because we have no adoption? Because the CPAs or the tax preparers have kept their heads down and not changed. And to me that's the hard part. Because tax software is so complex and it does take a lot of money to get there.

It does.

And you have to show adoption for VC to continue the funding. And, and so, so anyway, so that's my, that's the other side of it that actually concerns me. Whereas bookkeeping, the adoption is already here. It's already moving. Like, I don't, I think there's a huge opportunity for tax. But I also wonder is, will it continue or will tax people like almost hurt it? And that, that wouldn't be Blue Jay, because Blue Jay, I think is solid and already here. But I'm talking about truly from the tax prep side.

Well, that's because Blue J solves a problem that is the research side of things. It just makes that easier without liability. Really like any other thing that the liability, the risk angle hits accountants. And as somebody that comes from the tech industry a little bit, I think it's very hard to build technology in accounting because in most technologies you see the kind of hockey stick growth curve go like this. In accounting it goes like this. And it does have that. We saw bill.com is a great example in kind of relatively recent history and ramp is another one. But the reality is you have a much longer period where the industry gets comfortable. The problem is that technology is changing and improving so fast. What I wonder is actually going to happen is you're going to have this. One of the dichotomies in tax that I think has always been fascinating is if you bring out new college grads and put them in a big firm, you effectively are telling them, hey, we need to take your technology brain and your experience with technology, put it in a box and dumb you down to now use the tax software that you're going to use at this big firm. And I think what you're going to start to see is these younger generations of accountants that are going to hop out and say, I'm not doing that. I'M going to start to use this and you'll see more. I wonder if we're going to see more of a grassroots implication on tax where you have the more the younger generations are saying, I'm not going to do all of that. I'm going to use this stuff, get paid similar wages and just make a ton more money for a period of time.

QuickBooks Online and Microsoft 365 are essential tools for modern businesses. But what happens if your data is lost or compromised? Syscloud, a proud sponsor of the Accounting for Innovation podcast, provides advanced backup and recovery services as well as ransomware protection and anomaly detection, ensuring your business can continue operating even in the face of disaster. Syscloud peace of mind for your business's critical data. Visit syscloud.com to learn more. That's syscloud.com and now back to the show.

Yeah, so the, the only hard part about that is tax is so, so big and so complex that it, you know, but the other thing is I, I guess too on the other side of it is the tech costs are coming down significantly. And even like, so what's the ability to develop tax software faster, professional tax software faster, and it's a seasonal business. But that's the other side of it too, right? Like, you only have tax season once a year, so it's really hard to iterate through.

So it's seasonality. Does it provide an opportunity, I was actually asking our tax team this the other day. Does it provide an opportunity to test on the fall tax season versus the spring tax season? You know, looking at all the extensions and using those as your opportunity to maybe test and run parallel processes versus trying to do it when everybody's so busy.

So the yes and no. So the hard part is, is the development has to be approved by every state regulatory agency. And all of that stuff happens at the beginning of the year. So if you haven't developed it to get approvals, then it doesn't matter because you can't continue to iterate. So again, that's why, like, tax software is so difficult to build. It's not just the software. It's, it's the regulatory agencies, the IRS, and every state Department of Revenue or revenue agency that creates the bottlenecks and the rules that don't allow you to iterate fast enough. So not only do you have the CPAs who are holding you back, you have all the regulatory agencies who are holding you back. Hence why there's only three tax software providers or like the big ones Right.

You think they might all be in cahoots.

It's, they were the early ones, they got in and they, they figured it out and that's why they've been able to kind of, you know, hold the market. So but like I said, we have tax. Well, tax that got acquired by I win. So but they're in it now. You have Hub, HubSync. I think they're in it at, again at the bigger firm level. So like, and then there's the three new ones and like it seems like every other day someone's calling me to say, hey, I want to build tax software, so go for it. So, so maybe it's, maybe it's coming faster than we think. But again, I think it'll be interesting. But that, that's my word of warning. If you truly want tax software, we as a profession, we as tax preparers are going to have to help iterate through and get let some of these softwares actually be viable. Because if, if we're not, then guess what? The legacy providers are going to continue to do what they do.

So today you have a lot of people are thinking where do I start with AI and tax? Where do you have them start?

So I would start on the pre tax work. So I think it's TruePrep. AI is there, I think, I think it's Sorbonne, right. Is one of them. And I think there's a couple others that are really on the pre tax work. And I think that's where you start. And then I think you start in research and get used to like Blue Jay. I think you can use things like, I think it's tax plan iq, right. For projections and, and things like that. Right. So those are the ones that are like already like somewhat established. Right. When you think of AI and tax. But they're not in compliance, they're in the surrounding area. So they're either in projections or you know, research.

Yeah, I would agree. Kind of break things up and take out the unregulated aspects that are hard to do and start putting stuff in there, make your life easier. And when the regul aspects start to provide opportunities, then see and test and I think getting back to get your hands dirty and start trying things out, testing it out and you know, I think the Blue Jays of the world provide so much opportunity for people that have not been able to have access to information in the ways that bigger firms have. And you're democratizing information and you as a small firm or as a single accountant in a bigger firm now have access to look way smarter than you ever have in the past by leveraging AI. And I think that's really cool.

And absolutely make sure you're pricing for it and you're charging for it. Right? Just because it takes you seconds to find the answer doesn't mean you shouldn't charge for it. And I think the other thing is, even when we talk about accounting to get to tax, think about if you aren't doing taxes and you want to do some like quick write up work, you know, you could throw a bunch of bank statements into ChatGPT and you could get an Excel spreadsheet out and you can manipulate that data really quick to get to, I would call a quick and dirty tax return on a schedule C. Right? So like the way to manipulate data to get it into a tax return. Forget about even like the 1099s and all that stuff you're collecting. Just think about, you know, someone who has a simple schedule C with 12 bank statements that now you have the ability to, to by using AI to turn that stuff into a simple trial balance that you can manipulate in Excel and have that take you, you know, 10 minutes as opposed to re keying everything or trying to hunt down a bank login or doing something like that with it, right? Like you could now take a PDF and make it into again taking unstructured data and making it structured 100%. You can make it into a simple trial balance really quick to get into a schedule C return. So you know, I'll say that's the hack of AI, right? Versus like kind of this big software stuff. But I think that's the stuff firms need to think about too is like, what are all the little hacks that you can use AI to do your job easier as these other tools continue.

To evolve, how do you find the hard parts of your job and make them easier? It's a, it's something we've all been trying to do for our entire lives and now AI gives us more capabilities. So I think it's awesome. I think we're going to see a lot of tax or AI and tax and cast and workflow. AI is, is coming for everything and it's just going to make our lives easier and better. And Jody, I'm excited to talk about more aspects of that, more areas where we're going to see it in our episodes to come.