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AI in Accounting: Leveraging the New Era of Efficiency and Insight Part 2

By:
Irene Wachsler, CPA, MBA
Published Date:
Nov 1, 2024

This is part two of a two-part series on Leveraging AI for Tax Resolution and Client Success. To view part one, please click here.

First, it is crucial to understand the different types of AI models and capabilities readily available on the market today.

What is Artificial Intelligence?

Artificial Intelligence (AI) is a broad term for a computer system that performs tasks generally associated with human intelligence. AI systems have been around for a very long time. AI systems impact our lives daily—Siri and Alexa, Tesla’s self-driving cars, customer service, and technical support, to name a few. Today, most computer systems can easily pass the Turing test.[1]

AI’s power stems from a computer system’s ability to store, organize, and analyze data. The Rolodex[2] was one of the first examples of this type of data analysis. In the 1960s and 1970s, the Rolodex system shifted to storing data electronically on giant mainframe computer systems (IBM, Burroughs, UNIVAC). One popular application used by mass marketing agencies and large box-store retailers (Sears, Gimbels, Spiegel) was segmenting this electronic data to send direct or targeted advertising via U.S. postal mail to residential households.

In the late 1970s, personal computers (Apple, IBM, Tandy) were introduced. For only $1,500 each, a small business could purchase a PC primarily used for data analysis via a spreadsheet program (VisiCalc, Lotus 123).

In the 1990s, many software companies introduced Customer Relationship Management (CRM) systems. CRM software expanded the computer’s data analysis capabilities by allowing a business to track detailed demographic consumer information such as product preferences, household members' ages, etc.

This capability was greatly expanded in the 2000s and 2010s. Suppose you navigate to Ford Motor’s website to research a Ford Explorer. You may notice that your browser’s search engine and social media pages will start presenting you with offers to purchase a Ford Explorer from your local dealership. Ford uses CRM’s data analysis capabilities to market a Ford Explorer directly to you. This is driven by artificial intelligence, which is the next step in the generation of data analysis.

Just as our profession incorporated computing power into our suite of tools, we must add artificial intelligence to our toolset.

Artificial Intelligence Learning Language Models (LLM)

There are many different artificial intelligence learning language models (LLM):

  • Deep Learning. A computer neural network that attempts to model human learning by digesting and analyzing massive amounts of data. The computer repeatedly performs a task and tries to improve its accuracy each time to improve its skills.
  • Generative AI. The computer system generates text and images based on specific prompts/instructions.
  • Machine Learning. The computer system uses algorithms and statistical models to predict/calculate the result. An example is when your phone’s GPS gives you an ETA to your next destination.
  • Machine/Computer Vision (CV): A computer system analyzes and processes data from images and videos. Self-driving cars use CV.
  • Natural Language Processing. Allows computers to understand and process human language.
  • Neural Network. An artificial network based on a model of how the human brain works. Just like the human brain uses neurons to pass electrical impulses, the neural network uses nodes that pass data to each other.
  • Robotic Process Automation (RPA) is a computer program that automatically performs repetitive, rule-based tasks that humans perform. An example is the plethora of software programs or apps that automatically categorize QuickBooks transactions.

Many of these technologies are meshed together. One common feature is that they require vast amounts of data to process information. This is still data analysis. However, there are so many billions of data points that the human mind can no longer process all the data as efficiently or quickly as a computer can.

ChatGPT, Gemini, and Claude

For example, ChatGPT, Gemini, and Claude are bots or computer programs that use generative AI and natural language processing to simulate natural, human-like conversations, called prompts, to help professionals. These bots scour the Internet and other data sources to perform a dizzying array of tasks, including drafting/responding to emails, writing papers/essays, analyzing data, and streamlining business processes.

You can create your chatbot and restrict the data it accesses to provide an answer. The good news is that you don’t have to break the bank to create your chatbot. For example, I created a chatbot that analyzes IRS transcripts, notices, and tax returns and can also answer tax questions. I’ve restricted the chatbot’s knowledge base as I don’t want it to include information from TikTok videos.

I also created a bot that assists me with financial statement reviews. My bot can perform a financial analysis and draft financial statements and footnote disclosures.

Creating Your Own Chatbot

I use poe.com to create my bots. Poe also contains many prompt bot models, including ChatGPT, Claude, Gemini, Llama, and Mixtral.

  1. Create or log in to your account at Poe.com

     

  2. Select Create Bot in the upper left-hand corner.


     

  3. For IRS tax resolution/controversy assistance, we’re going to create a prompt bot.



  4. Give your bot a unique name and select a base bot.


     

  5. Scroll down and upload specific PDF files for your bot’s knowledge base. These documents should be authoritative as they will form the basis for your bot to provide answers/solutions.



  6. Scroll down and select Advanced > Bot Profile > Access options.




  7. When you are finished, save your Bot.

    You can also edit your bot by selecting the three dots under your bot and choose Edit bot




Congratulations! You’ve created your personalized chatbot without writing a single line of code.

Risks

As with any technology, there are also many risks. Each practitioner must assess the benefits provided against the risk involved. Some of the risks are:

  • Copyright infringement. Some private news sources, such as Tax Notes, explicitly prohibit the use of loading their articles into an AI knowledgebase.
  • Deepfakes. AI is used to imitate one person's likeness and voice with another. These images can then be used to spread disinformation by creating fake news and misleading videos.
  • Hallucinations. Often, when the AI computer system can’t predict an answer, it will make up an answer and present this false or misleading information as facts. This is why it’s essential to fact-check the information that your chatbot provides you with.
  • Sensitive client information. Bots share data with their creators to improve the LLMs. You don’t want your chatbot to share your clients' sensitive information, such as their social security number, name, etc.
  • Threat actors. Bad actors can manipulate AI systems with corrupt data, accessing your public information, including social media, to make educated guesses about your login and password information for your online accounts (e.g., banking, and tax software). This is one of the reasons why the IRS now requires multi-factor authentication (MFA) before you can access any system containing your client’s sensitive information.

Example. IRS Transcript Analysis

I uploaded a client’s tax return and IRS transcripts. Please note that I stripped all personal information – SSNs, addresses, names, and unique identifier on IRS transcript).


 

Then, I asked my bot to draft a letter to the IRS requesting the refund of the additional $2,000.


Frank Agostino’s Recommended Resources to Build Your AI Library for Tax Controversy

›    Calculation of the Collection Statute Expiration Date   (CSED) - https://www.irs.gov/irm/part5/irm_05-001-019  

›    Audit reconsideration - Publication 3598 - https://www.irs.gov/pub/irs-pdf/p3598.pdf

›    Innocent spouse relief - Form 8857 - https://www.irs.gov/pub/irs-pdf/f8857.pdf

›    Offers in Compromise (OIC) based on doubt as to liability - Form 656-L - https://www.irs.gov/pub/irs-pdf/f656l.pdf

›    Refund/Abatements of Tax - Form 1040x - https://www.irs.gov/pub/irs-pdf/f1040x.pdf

›    Bankruptcy Discharges - See generally, discharge of taxes in bankruptcy - https://www.bankruptcylawyerpa.com/posts/you-can-discharge-income-taxes-in-bankruptcy

›    Penalty Abatement - http://www.irs.gov/irm/part20/irm_20-001-001r-cont01.html 

›    Interest Abatement - Form 843 - https://www.irs.gov/forms-pubs/about-form-843

›    Currently Not Collectible - https://www.irs.gov/irm/part5/irm_05-016-001r

›    OIC based on Doubt as to Collectability - https://www.irs.gov/taxtopics/tc204

›    Form 656 - https://www.irs.gov/pub/irs-pdf/f656b.pdf

›    Installment agreements (Payment Plans) - https://www.irs.gov/payments/online-payment-agreement-application

›    Form 9465 - https://www.irs.gov/forms-pubs/about-form-9465

›    Designating voluntary payments - https://www.journalofaccountancy.com/issues/2013/dec/withholding-liability.html

›    Releasing Levies and Levied Property - https://www.irs.gov/businesses/small-businesses-self-employed/how-do-i-get-a-levy-released

›    Form 14135 - https://www.irs.gov/pub/irs-pdf/f14135.pdf

›    Withdrawal of notices of federal tax liens (NTFL) - https://www.irs.gov/irm/part5/irm_05-012-009

›    Requesting assistance from the Taxpayer Advocate - Form 911 - https://www.irs.gov/pub/irs-pdf/f911.pdf

Sample Prompt/Response for IRS International Exam Forms (provided by Frank Agostino, Esq.)

Prompt

Review/Lean/Memorize: IRM 20.1.7, https://www.irs.gov/irm/part20/irm_20-001-007r, IRM 20.1.9, https://www.irs.gov/irm/part20/irm_20-001-009, IRM 20.1.10, https://www.irs.gov/irm/part20/irm_20-001-010r, IRM 8.11.5.1, https://www.irs.gov/irm/part8/irm_08-011-005, IRM 4.26.16, https://www.irs.gov/irm/part4/irm_04-026-016, IRM 4.26.17, https://www.irs.gov/irm/part4/irm_04-026-017r, IRM 5.21.6, https://www.irs.gov/irm/part5/irm_05-021-006, IRM 8.11.6, https://www.irs.gov/irm/part8/irm_08-011-006, and list all the forms and letters that the IRS, and not the taxpayer, prepares in an international examination.

Response

I have reviewed the specified IRS Internal Revenue Manual (IRM) sections and extracted relevant details from them. Based on the information, here is a summary of the forms and letters that the IRS, and not the taxpayer, prepares in an international examination, particularly in relation to FBAR (Foreign Bank and Financial Accounts) penalties and related procedures.

Forms and Letters Prepared by the IRS:

  1. Form 13535 - Report of Foreign Bank and Financial Accounts Related Statute Memorandum (RSM)
    • Used to document whether a potential FBAR violation was in furtherance of a potential Title 26 violation.
  2. Form 13536 - FBAR Monitoring Document (FMD)
    • Used to start or track FBAR cases, especially when no RSM is required.
  3. Form 13448 - Penalty Assessment Certification Summary (Title 31 “FBAR”)
    • Used internally to verify that an FBAR penalty has been assessed.
  4. Form 13449 - Agreement to Assessment and Collection of Penalties under 31 U.S.C. 5321(a)(5) and 5321(a)(6)
    • Used to formalize the taxpayer's agreement to the assessed FBAR penalties.
  5. Letter 3708 - Notice and Demand for Payment of FBAR Penalty
    • Issued to notify the taxpayer of the assessed penalty and demand payment.
  6. Letter 3709 - FBAR 30-Day Letter
    • Issued to notify the taxpayer of the proposed FBAR penalty and provide an opportunity to appeal.
  7. Letter 3708A - Notice for Demand and Payment of FBAR Penalty after Appeal Denial
    • Issued if the penalty is not paid following an unsuccessful appeal.
  8. Letter 5080 - FBAR Penalty Agreed Closing Letter
    • Sent to the taxpayer when the FBAR penalty is agreed upon, closing the case.
  9. Letter 5157 - Non-docketed Acknowledgement and Conference
    • Sent to acknowledge receipt of an appeal and explain the appeals process.
  10. Letter 5834 - Foreign Bank and Financial Accounts Report (FBAR) Agreement Form Transmittal
    • Accompanies Form 13449 to the taxpayer for signature.

Key Points:

  • The IRS prepares these forms and letters as part of their administrative process in handling international examinations, particularly in cases involving FBAR penalties.
  • These forms are used for both pre-assessment and post-assessment procedures, including initiating cases, assessing penalties, and notifying taxpayers.

This summary should help you understand the IRS's administrative procedures in international examinations related to FBAR and other related penalties.

Prompt

Draft a FOIA request for my client, John Doe. A sample FOIA request is attached. The following are relevant facts for the tax controversy. Use the facts to determine what to request in the FOIA, but do not provide more facts than you need to, as it is not necessary in a FOIA request. The facts are as follows: John Doe, a dual citizen of the United States and Germany, lived in Germany from 2015 to 2022, where he accumulated significant wealth through various foreign business ventures.

Upon returning to the United States in 2023, John learned about his obligation to file the Report of Foreign Bank and Financial Accounts (FBAR) under the Bank Secrecy Act (BSA). Upon learning of his obligations in 2023, John promptly filed the overdue FBARs, disclosing 5 accounts in 2019, 4 in 2020, 7 in 2021, and 5 in 2022.

The IRS reviewed John’s late-filed FBARs and, while not contesting the accuracy of the filings, assessed penalties on a per-account basis for violations under 31 U.S.C. §§ 5314 and 5321. Additionally, the IRS found that John had failed to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, for the years 2019 to 2022.

John again claims that he was unaware of his obligation to file Form 5471 and that he did not intentionally violate the law. However, the IRS contends that John should have known about his filing requirement and that his failure to file was neglect. The IRS assessed penalties against John under 26 U.S.C. §§ 6038(b) for his failure to file Form 5471 for the years 2019 to 2022.

Apply the following prompt: Draft a Freedom of Information Act (FOIA) request letter, incorporating provisions from the Freedom of Information Act (5 U.S.C. 552), the Privacy Act (5 U.S.C. 552a), and IRS regulations under 26 C.F.R. § 601.702(c)(5). The purpose of this request is to obtain access to and copies of all administrative files maintained by the IRS concerning the assessment of international tax penalties under IRC 6751(b). Specifically, the request should include the following:

Forms and Letters:

Form 8278: This form relates to the assessment of miscellaneous penalties, including international penalties under IRC 6038(b).

Form 5345-B: This form is used for the Examination Request for various compliance issues, including international tax matters.

Any other applicable forms or letters related to the determination and assessment of penalties under 31 U.S.C. 5321 and IRC 6038(b).

Verification and Approval Documents:

All documents, including any supervisory approvals required under IRC 6751(b), that relate to the initial determination and subsequent assessment of the penalties in question.

The Entire Administrative File: The complete administrative file for the taxpayer, including all correspondence, emails, internal IRS memoranda, examination reports, and activity logs related to the examination and assessment of penalties under 31 U.S.C. 5321 and IRC 6038(b).

Specific Legal References:

Ensure that the request cites 5 U.S.C. 552 and 5 U.S.C. 552a for the Freedom of Information Act and the Privacy Act, respectively. Reference 26 C.F.R. § 601.702(c)(5) for IRS procedural rules governing FOIA requests.

Processing Details:

Include a statement agreeing to pay reasonable charges incurred in locating and copying the requested documents, up to a specified amount (e.g., $200).

Request that if any part of the requested records is exempt from disclosure, the IRS provides a detailed index and description of the withheld material, along with the statutory basis for the exemption.

Form 2848 Attachment:

Mention that a signed Form 2848, Power of Attorney and Declaration of Representative, is attached, authorizing the representative to request and receive the requested information on behalf of the taxpayer.

Acknowledgment of Receipt:

Request that the IRS acknowledge receipt of the FOIA request by countersigning a copy of the letter and returning it in an enclosed, self-addressed, stamped envelope.

The request should be addressed to the IRS Disclosure Scanning Operation and include all necessary taxpayer information (name, address, EIN or SSN, type of tax, and tax years) as required by the IRS. The letter should conclude by requesting a response within the statutory period, typically 20 working days.

Response

AGOSTINO & ASSOCIATES
A PROFESSIONAL CORPORATION
COUNSELLORS AT LAW

14 WASHINGTON PLACE
HACKENSACK, NEW JERSEY 07601
(201) 488-5400
FAX (201) 488-5855

FREEDOM OF INFORMATION ACT, PRIVACY ACT & IRC § 6103 REQUEST

BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED
& BY FAX: 877-891-6035

September 3, 2024

Internal Revenue Service
Disclosure Scanning Operation B Stop 93A
P.O. Box 621506
Atlanta, GA 30362-3006

ATTENTION: FOIA REQUESTS

RE: John Doe
Address: [Your Address Here]
SSN: [Your SSN Here]
Type of Tax: International Tax Penalties (FBAR and Form 5471)
Tax Years: 2019-2022

Ladies & Gentlemen,

We represent the taxpayer identified above (hereinafter "Taxpayer"). A copy of our IRS Form 2848, Power of Attorney and Declaration of Representative ("Form 2848"), is annexed hereto as Exhibit A.

Pursuant to the provisions of:

  1. Sections 6103, 7602(c), and 7803 of the Internal Revenue Code ("IRC"),
  2. the Freedom of Information Act (the "Act" or "FOIA"), 5 U.S.C. § 552, as amended, and
  3. the Privacy Act, 5 U.S.C. § 552a,

we request access to and copies of all administrative files maintained by the Internal Revenue Service ("IRS") that relate to the assessment of international tax penalties under IRC § 6751(b), including but not limited to the following:

Forms and Letters:

  • Form 8278: Assessment of miscellaneous penalties, including international penalties under IRC § 6038(b).
  • Form 5345-B: Examination Request for compliance issues, including international tax matters.
  • Any other applicable forms or letters related to the determination and assessment of penalties under 31 U.S.C. § 5321 and IRC § 6038(b).

Verification and Approval Documents:

  • All documents, including any supervisory approvals required under IRC § 6751(b), that relate to the initial determination and subsequent assessment of the penalties in question.

The Entire Administrative File:

  • The complete administrative file for the taxpayer, including all correspondence, emails, internal IRS memoranda, examination reports, and activity logs related to the examination and assessment of penalties under 31 U.S.C. § 5321 and IRC § 6038(b).

Processing Details:

  • We agree to pay reasonable charges incurred in locating and copying the requested documents, to an upper limit not to exceed $200.
  • If any part of the requested records is exempt from disclosure, we request that the IRS provide a detailed index and description of the withheld material, along with the statutory basis for the exemption.

Form 2848 Attachment:

  • A signed Form 2848, Power of Attorney and Declaration of Representative, is attached, authorizing the undersigned to request and receive the requested information on behalf of the taxpayer.

Acknowledgment of Receipt:

  • Kindly acknowledge receipt of this request by countersigning the enclosed copy of this letter and returning it in the self-addressed, stamped envelope provided.

We request a reply within twenty (20) working days as provided by statute.

Very truly yours,

AGOSTINO & ASSOCIATES, PC

By: [Your Name Here]
Enclosure: Exhibit A, IRS Form 2848

There will be a 2-4 hour deep dive into creating and using your own bots at the Meet the IRS Conference on Jan. 22, 2025.

The author wishes to thank Frank Agostino, Esq., who introduced her to poe.com, which she uses to create her own chatbots.


Irene Wachsler, CPA, MBA, is a sole practitioner in Greater Boston, specializing in accounting and tax solutions for small businesses, self-employed individuals, and the film and entertainment industry. She is also experienced in cryptocurrency taxation and IRS Tax Controversy/Problem Resolution. Irene received her BS in Mathematics with a minor in computer science from the University of Lowell and her MBA from Babson College. Irene’s experience also includes audit work at Deloitte. Irene is the vice chair of the NYCPA’s Relations with the IRS Committee. She was the Massachusetts Society of CPA’s South Shore Breakfast Forum Coordinator for over 15 years. She is also a published author in the Massachusetts Sum News and Missouri CPA and was interviewed in a podcast with the Pennsylvania CPA Society.


[1] An individual, or Evaluator, sits alone in one room and asks questions, usually via keyboard, to another individual human and a computer system. Based on the answers, the Evaluator identifies which response came from the human. If the Evaluator cannot reasonably assess who the human is, then the computer system has passed The Turing test or otherwise known as the Imitation Game.

[2] Hildaur Neilsen introduced the Rolodex in 1956, a flip-through desk tool that allowed businesses to file and organize customer information by various categories (name, city, product preference—e.g. Coke™ vs. Pepsi™, etc.).