Can Tax Professionals Face Penalties Based on the Use of AI?

 Posted on July 31, 2026 in Taxation Law

Artificial intelligence (AI) tools have become more and more powerful in recent years, and they are being used by people in a wide variety of professions. While AI can seem incredibly helpful, quickly generating text, processing data, performing calculations, and providing answers, these tools are not always accurate. Because of the potential risks of relying on AI, tax professionals such as accountants, tax preparers, and attorneys may encounter problems when using these tools.

As the IRS or other government agencies review how AI is used in tax-related matters, they may take steps to impose penalties on people or organizations that have failed to follow the proper professional standards. An attorney who understands tax laws, rules, and regulations can provide guidance on how to address potential penalties while also making sure the proper procedures are followed when using AI in the future.

Problems With Reliance on AI

Concerns related to the use of AI have been well-documented in the legal field. There have been numerous cases where attorneys have been sanctioned for submitting court documents created using AI that contained incorrect information. AI tools may make "hallucinations" in which they fabricate information about statutes, case citations, or other details. Legal professionals have faced public censure, disciplinary action, financial penalties, and other sanctions for filing AI-generated materials with incorrect information.

Other issues may also affect people who use AI to prepare tax filings or process financial data. The procedures followed by AI in these cases may not be fully understood, and it may be impossible to tell what data was processed and what calculations were performed. Without full transparency about how decisions were made and without verification of the answers that tools generated, tax professionals could face penalties for failing to meet the proper standards when providing services for clients.

Guidelines for the Use of AI in Tax Practice

The IRS Office of Professional Responsibility has issued guidelines for the responsible use of AI by tax professionals. These guidelines are meant to ensure that professionals comply with the regulations under Circular No. 230 when using AI.

The guidelines state that professionals are required to exercise due diligence and follow the proper standards for competence when using AI tools. They will need to fully review all documents created by AI and verify the accuracy of facts and citations. They will also need to verify any calculations that were made without relying solely on AI. Human review and editing are essential to avoid mistakes, falsified information, or inaccurate calculations. An understanding of how AI systems work, their limitations, and the potential risks of inaccurate information can help ensure that clients are provided with the proper advice and that tax filings can be made correctly.

The fees that professionals charge may come under scrutiny when they use AI. When AI tools allow professionals to operate more efficiently by reducing the time needed to perform research or prepare documents and filings, cost savings should be passed on to clients, and honest billing practices should reflect the efficiency that was gained by using AI. Professionals could face penalties if they bill clients for labor that was not actually performed or time that was not actually spent providing services because of the use of AI.

Security may be a concern when using AI. When client data is uploaded to public AI systems, there is a risk that this information could become accessible to others. Professionals will need to ensure that AI tools are secure and that the proper safeguards are in place to protect client confidentiality. The unauthorized disclosure of tax return information could lead to both civil and criminal penalties for professionals.

The guidelines also highlight the procedures that should be followed to ensure compliance with the rules for AI use. Staff members should receive training on the use of AI, including the technical limitations of tools, the potential risks, and the requirements that must be met as they prepare documents or filings. Protocols must be put in place to ensure that data will be handled correctly while maintaining confidentiality and that AI outputs are reviewed for accuracy. All AI tools should be thoroughly reviewed before they are purchased or used to ensure that they will function correctly while meeting the proper security standards.

Contact Our San Jose Tax Attorney

As the use of AI becomes more widespread, tax professionals may encounter issues related to accuracy, security, or other factors that could affect their practice. Taking the right steps to follow the IRS’s guidelines can be crucial when using AI. In cases where the use of AI could lead to penalties, professionals will need to understand how to respond. At John D. Teter Law Offices, our San Jose, CA tax lawyer can provide guidance on how these issues may be addressed while working to avoid potential penalties. Contact us at 408-866-1810 to set up a consultation and discuss these issues with us.