IRS and tax experts offer last-minute tax tips

The Internal Revenue Service provided some final tax advice Monday, a day ahead of the April 18 close of tax season, and some tax experts are advising clients to take advantage of Roth IRA conversions but to tread carefully with the latest advances in artificial intelligence as tax season nears an end.

For answers to tax law questions, taxpayers can find tools like the Interactive Tax Assistant on IRS.gov or use the Frequently Asked Questions tool to find answers to many different topics. Other resources on the site include information about getting a tax transcript, tracking the status of a refund, filing a return, payments and penalties, and what to do if taxpayers or tax clients are the victims of identity theft, tax fraud or a tax scam. 

To see their federal tax information, taxpayers can access their online account with the IRS, especially if they still owe taxes from prior years. The account will show information such as a payoff amount, the balance for each tax year owed, their payment history and key information from their current-year tax return as originally filed.

Taxpayers can also use the Get Transcript tool to view, print or download their tax transcripts after the IRS has processed the return. They can find up-to-date information about their tax refunds using the "Where's My Refund?" tool on IRS.gov and through the IRS's IRS2Go mobile app. Within 24 hours after the IRS acknowledges receipt of an electronically filed return, taxpayers can start checking on the status of their refund.

IRS tax season report card

The Treasury Department issued a report card of sorts Monday on the IRS's progress this tax season, now that it has received extra funding from Congress as a result of last year's Inflation Reduction Act.

Samuel Corum/Bloomberg

The IRS achieved an 87% level of service this year, exceeding Treasury Secretary Janet Yellen's goal of 85%. The agency also answered 2 million more calls through live assistance, reduced phone wait times to four minutes from 27 minutes, served 100,000 more taxpayers in-person, digitized 80 times more returns than in 2022 through the adoption of new scanning technology, cleared the backlog of unprocessed 2022 individual tax returns with no errors, launched two new digital tools, and enabled a new direct-deposit refund option. That represents a big improvement over last year, when the IRS hit just a 15% level of service to taxpayers and millions of refunds were delayed for months.

Due to the 5,000 new hires made possible by the Inflation Reduction Act, IRS customer service representatives answered more than 6.5 million taxpayer calls this year, 2.4 million more calls with live assistance since the start of the year through April 7, compared to the same period in 2022. The IRS added new technology features like customer callback options, which will be available for 95% of taxpayers calling for toll-free live assistance by the end of July 2023. 

Roth IRA conversions

While the IRS operations seem to have improved this tax season, tax professionals can help their clients with tax planning after tax season around their individual retirement accounts as a way to save taxes later this year.

"We're seeing a lot of interest from clients around looking at Roth IRA conversions," said Michael Prinzo, managing principal of tax at Top 10 Firm CliftonLarsonAllen. "That topic has received more visibility the last several years and we have more clients interested in that. Taxpayers should consider a Roth IRA conversion annually to determine if it would make sense for them to convert a portion or all of a traditional IRA to a Roth IRA."

He cited some examples where a conversion could make sense for taxpayers, such as when they anticipate a significant reduction in income in the current year, whether from a retirement or a decrease in their investment income, based on what's happening in the market.

"Sometimes even losses that are incurred with a flow-through or a pass-through business can create an opportunity to absorb some of the income that comes by converting an IRA to a Roth IRA," he added.

Other kinds of investment losses could spur a Roth IRA conversion as well.

"When we see a significant drop in the value of assets within an IRA, and the account owner expects those assets to recover in time, that's a great opportunity to examine if it's better to do that conversion today and allow recovery of that asset value to happen in a tax-free account, versus leaving it in a traditional IRA," said Prinzo. 

Another incentive for looking at retirement planning accounts is the passage of the SECURE 2.0 Act last December as part of the omnibus spending package (see story). 

Changes in tax rates and estate planning could also spur more interest in IRAs at tax time. "When taxpayers anticipate higher tax rates in the future and don't want to necessarily be compelled to withdraw assets out of an IRA when there's higher rates, it may be more favorable to incur that income today, pay the tax today, and allow that asset to grow in a tax-free account," said Prinzo. "When there's a long investment horizon and the asset is not needed for many, many years, sometimes even decades, that's a great time to consider that."

"We've seen a lot of interest from clients who are doing legacy planning or have estate-planning goals that they're trying to achieve where they might not need that IRA in those retirement years," he added. "They're looking at that asset as potentially a legacy that will go to the next generation." 

AI in tax

With artificial intelligence making incredible strides in recent months — thanks to the sudden onslaught of new "generative AI" chatbot services like OpenAI's ChatGPT, as well as Google's Bard, and the integration of OpenAI's technology in Microsoft Bing — already some tax companies have launched their own AI services like Taxaroo's ZeroTax.ai. And the London office of Big Four firm PricewaterhouseCoopers also announced a global partnership last month with an AI startup called Harvey to provide the legal business solutions professionals at PwC with access to the OpenAI and ChatGPT technology used in Harvey.

Other tax technology companies are taking notice of the trend. "AI has come a very long way in the last few months and made some leaps and bounds, but I think it has to be directed quite well," said Ahmad Ibrahim, CEO of Neo.Tax, a startup in Mountain View, California, building tax-filing automation software. "People saw some demonstrations, for example, when they were announcing GPT-4, and people got excited saying, "I can just throw AI at my taxes in order to do my taxes for me.' I think that's a little naive. It can be incredibly powerful and capable, but you're likely not just going to hand it everything. It's got to be directed at particular problems to solve and particular tasks that it can do."

While GPT-4 has reportedly been able to absorb the Tax Code, it needs to be coached and prompted to provide useful answers. "Perhaps you can produce some cutesy kind of summaries where you can say, 'Hey, summarize this part of the Tax Code as if you're Dr. Seuss,' for example," said Ibrahim. "It can do things like that, which are nice, but what do you point it at? How do you coach and direct it and prompt it? How do you prevent it from hallucinating?"

Hallucination involves an AI chatbot producing seemingly plausible answers that are completely imaginary. To avoid this hallucination effect, chatbots will need to be carefully trained by tax experts. 

"One of my co-founders is a former IRS agent, formerly at PwC, KPMG and Arthur Andersen, who has a ton of experience and has seen both sides, the tax prep side and the audit side of the IRS," said Ibrahim. "And [the AI] hallucinates quite a bit, but he's able to ask it something — it'll hallucinate and he'll say, 'This part's right and this part's wrong.' So he'll ask another question to correct it. Then it'll keep doing this. It will sort of micro-adjust its trajectory. You can imagine that he's guiding it and putting it on guardrails. He's getting feedback about how effective this guardrail was, so he's adjusting it in the next prompt and the next question, and then at the end of maybe 15 to 30 back and forths, he's able to get it to where now it's saying the right stuff."

Ultimately, he believes the power of AI will need to be wielded by experts who know a subject ahead of time, like tax professionals advising their clients about their taxes.