Empowering tax operations with AI

As we embrace the business realities of the post-pandemic era, the need for digital transformation has become even more essential. Digital transformation generally involves the use of technology to fundamentally change how businesses operate and deliver value to customers. One of its core technologies is artificial intelligence, or AI.

Al has emerged as a critical component of digital transformation. It allows detailed, accurate data extraction from sources to drive more in-depth questions, answers and analyses that would previously be difficult, time consuming, or even impossible to accomplish. AI can perform structured or unstructured tasks, mimicking the actions of humans, but with greater speed and accuracy. With AI, organizations can automate routine tasks, analyze vast amounts of data and gain valuable insights that can drive innovation and growth. 

For the past years, we have seen how AI rapidly transformed the way business operates, and tax operations are no exception.

Tax operations are complex and time-consuming, and with the disruption in business caused by the pandemic, many companies have turned to AI to automate tax processes, among others, to improve efficiency. AI has helped businesses manage tax operations by streamlining processes, reducing errors, and providing real-time insights into tax compliance.  As a consequence, more and more tax professionals are turning to AI to leverage its capabilities and effectively manage tax operations, in general. These transformative capabilities of AI apply throughout the entire tax lifecycle from planning to compliance, reporting and controversy.

Among the most impactful uses of AI are the following:

1. Automating tax return preparation and filing

One of many ways in which AI can be used in tax operations is through the automation of routine tasks, such as periodic tax return preparation and filing.  Certain AI-powered software used solely or in tandem with Robotics Process Automation (RPA), for instance,  can accurately extract data directly from source, such as the trial balance, invoices, and other relevant documents, and organize them into the prescribed tax forms. Through its machine learning algorithms, these AI-powered systems can also analyze tax returns for errors or discrepancies, thus reducing the time and resources required for manual data entry, which frees up staff to focus on more strategic and value-adding tasks.

2. Monitoring tax compliance and improvement

Another area where AI can be useful is in tax compliance monitoring and improvement. With so many changes or updates in tax rules and regulations, AI can help businesses stay compliant by alerting them to new tax developments. Needless to say, monitoring compliance to changes in tax rules is not easy and can be even more challenging without a good and reliable tool.  With an AI-enabled monitoring tool, businesses can be updated on a more timely and regular basis, thus avoiding noncompliance which could lead to painful tax assessments and reputational risk.

AI can also help improve tax compliance by analyzing large datasets to identify trends and patterns that may indicate potential tax issues. This enables businesses to proactively address compliance issues before they become major problems and reduce tax assessment risks which could be costly and time consuming.

3. Enhancing the tax audit process and fraud detection

AI can also help businesses prepare for tax audits and improve the audit process. By analyzing past audits and identifying areas of weaknesses, AI can help businesses improve their compliance and reduce tax audit risks.

Tax authorities or agencies can also harness the power of AI in conducting tax audits.  In certain jurisdictions, AI is used by these agencies to identify cases that could indicate potential fraud. By analyzing huge amounts of data, AI can detect anomalies and suspicious activities that may indicate fraudulent behavior.

For example, in one country, tax officials have successfully incorporated AI into their Goods and Services Tax administration. In the first year of implementation, only a few cases of fake invoicing were detected and two people were arrested. However, in the following year, the tax agency saw improved detection with more than a thousand cases of fake invoicing being identified and more than a hundred people were arrested. 

Several European Union (EU) countries have also been using AI to detect tax fraud. In one EU country, tax officials were able to identify an estimated 60 out of 100 cases of tax fraud using advanced technologies. These show how AI can be powerful and is widely used across geographies.

4. Forecasting and predictive analytics

Another area where AI can be helpful is in the analysis of tax data to formulate business strategy and make better decisions about tax planning and forecasting. Predictive analytics can analyze historical data to identify trends and patterns. For instance, algorithms can analyze sales data to help detect trends within various tax filing cycles — an annual, quarterly, or monthly basis. Those trends can then be used as the basis for predicting what’s likely to happen next, which could be helpful in providing better sales forecasts and related tax obligations. By analyzing these data, businesses can gain insights into their operations and identify areas for improvement. This also guides and helps decision-makers optimize their business strategy by reducing costs in order to improve profitability.

The increasing demand for AI in tax operations shows how businesses are adapting to the new technologies to stay competitive in the post-pandemic era. As the technology continues to evolve, we can expect to see even greater innovation in tax operations and new opportunities for businesses to optimize their operations and reduce costs. Companies that embrace digital transformation and AI will be well positioned to stay afloat in the digital age and in this post-pandemic world.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.


Nelson V. Soriano is a tax director at Isla Lipana & Co., the Philippine member firm of the PwC network.

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