Responsible AI Use for Tax Professionals
Published June 26, 2026
Artificial intelligence (AI) has become a popular technology for many tax professionals as they review documents using the well-known AI programs such as ChatGPT, Claude, Gemini or Grok. Some tax professionals have also built their own AI applications.
On June 24, 2026, the IRS Office of Professional Responsibility (OPR) published a series of guidelines for responsible use of AI by tax professionals. AI is essentially a software program that attempts to duplicate human cognitive skills. Legal research providers are also incorporating AI into their products given its usefulness in document review projects.
A recent development has been the use of generative artificial intelligence. These AI programs are designed to make decisions by using sophisticated neural node software that allows the program to interact and evolve. Tax professionals use generative AI because of the cost savings and rapid data analysis.
However, AI has the potential for fabricating an output called a “hallucination.” As a result, the use of AI also raises concerns regarding client privacy.
There has also been increasingly improper use of generative AI by some attorneys. For instance, the courts have sanctioned attorneys for briefs that included fake citations. The sanctions have included financial penalties, a requirement to attend a professional responsibility course, a default judgment in favor of the other party or a disciplinary referral to a state bar association.
Because AI is an attractive and powerful tool that could improve the efficiency of tax professionals, the OPR issued specific guidelines for written advice prepared by tax professionals which includes:
- Factual and Legal Assumptions – The advice must include reasonable assumptions regarding both prior and future events.
- Relevant Facts and Circumstances – A tax professional must review the AI material to ensure all facts and circumstances are stated correctly.
- Reasonable Efforts – A tax professional must exercise reasonable efforts to determine whether the facts presented are correct and there is appropriate advice on federal tax matters.
- Representations and Statements – A tax professional should review any projections, financial forecasts or other findings based on a reasonableness standard.
The basic rule is that written advice must contain "reasonable factual and legal assumptions." A tax professional needs to authenticate both the facts and the legal analysis.
The OPR outlines several best practices for responsible AI use. Tax professionals should be knowledgeable on relevant federal and state-specific laws. AI data must be handled in a secure method. AI logs should be maintained for document review or legal research. There should also be procedures in place to handle any data breach or error. Tax professionals should not upload sensitive client data that could become part of a large language model (LLM). Finally, the generative language produced by AI should always be treated as a draft. The resulting document must be reviewed, thoroughly checked for factual and legal accuracy and edited as required.
The OPR notes, "However, ethical obligations of competence, diligence, and confidentiality remain unchanged. By implementing robust use-management strategies and maintaining human supervision, tax professionals can harness AI’s benefits while safeguarding reliability and public trust."
IRS Receives "Better Than Expected" Grade
National Taxpayer Advocate Erin M. Collins publishes a report each year on the performance of the Internal Revenue Service (IRS). In her most recent report, the IRS was rated "better than expected in most respects."
There were approximately six months between passage of the One Big Beautiful Bill Act (OBBBA) and the start of the tax-filing season. Collins noted that the IRS moved forward with improved information technology and this was "the most important factor" for a successful season.
Collins continued, "The IRS is often held up as the poster child for antiquated government technology infrastructure, and there is certainly some truth to that characterization. But the IRS has been improving its technology year by year, and as long as it gets the IT right, most taxpayers file their returns and receive their refunds without delay."
The OBBBA required major reprogramming of IRS software and computers. There were also massive revisions for many IRS publications and a need to educate the public.
Former Acting IRS Commissioner Douglas O’Donnell was positive about the IRS result. O’Donnell stated, "It is important to note that this is not only a challenge for systems and programming, but the challenges extend to forms, publications, employee training, and desk guides to aid employees while on the phones, in addition to public outreach to ensure the public's awareness of changes.”
The IRS has steadily attempted to modernize and accommodate digital filing, direct deposit and other strategies. Collins explained that this is helpful, but it is also important to have good human support. She continued, "As the IRS continues to transform its operations, it must preserve meaningful access to telephone assistance, in-person service, clear notices, timely correspondence and effective case resolution functions.” In addition, taxpayers must understand how to obtain help and be confident that they will be treated fairly if a problem arises.
The efforts to improve the IRS are a challenge given the reduction in staffing. In one year, the IRS has reduced its staff by approximately one-fourth. As a result, the IRS has been forced to reduce the number of taxpayer assistance centers and the number of staff answering taxpayer questions.
Collins noted that IRS staffers answered 20% fewer calls compared with last year. As a result, many taxpayers had to rely on computer "voicebots" to answer their questions. In addition, aproximately four out of every five taxpayers talking to an IRS voicebot ended up hanging up or seeking assistance from a human. Collins noted, "Taxpayers who required assistance from the IRS often struggled to get it."
As the IRS moves forward, Collins emphasized that there needs to be a balance between the number of staff answering phone calls and the ability of technology to provide good taxpayer support.
Editor's Note: IRS CEO Frank Bisignano has recognized it is important to increase the number of taxpayer support representatives. Bisignano wrote, "We remain committed to continuously improving service delivery and working to provide taxpayers with timely and effective assistance." In response to this need, Bisignano recently lifted an IRS hiring freeze to permit the Service to hire more support staff.
Risks with Charitable LLCs
In a recent Tax Notes article, attorney Hale E. Sheppard of Eversheds Sutherland reviewed many of the Internal Revenue Service (IRS) positions with respect to charitable LLCs.
According to the Tax Notes article, the IRS has raised concerns about charitable LLCs as some charitable LLCs have reported inflated charitable deductions. As a result, the "IRS has broadened its scope, scrutinizing taxpayers who gifted partial interests in legitimate, established, operating entities."
Charitable transfers are generally deductible under Section 170. Many contests with the IRS are based on valuation of appreciated property. Other questions are: Did the taxpayer make a completed gift? Did the charity receive the claimed value?
A charitable LLC is frequently created with a voting interest that is retained by the taxpayer and a nonvoting interest that is transferred to a public charity. The taxpayer likes the flexibility of this plan because it allows the taxpayer to retain management control. In addition, there is no obligation to distribute specific amounts of income or assets to the charity. The charitable LLC is also not subject to the prohibitions on self-dealing under Section 4941. These benefits allow greater freedom to sell, exchange or lease property or borrow from the LLC. The controlling party may also select employees and determine their compensation. Finally, a charitable LLC is not required to file IRS Form 990, Return of Organization Exempt From Income Tax or IRS Form 990-PF, Return of Private Foundation.
The issues that would benefit from additional guidance include the value of the charitable tax deduction. Tax Notes explains some of the valuation issues include that the deduction is affected by the ability of the taxpayer to control the charitable LLC. Additional concerns would include the taxpayer’s ability to borrow money and make only small annual distributions to the charity, and the taxpayer’s right to repurchase the charitable interest at a discounted value.
In 2018, the Justice Department filed a complaint against Michael Meyer, a promoter of the charitable LLC with the title "Ultimate Tax Plan." Later, the IRS published Field Attorney Advice (FAA) 20212502F. The FAA challenged the Ultimate Tax Plan and similar entities. It argued the plan did not meaningfully change the taxpayer's economic position, that the nonprofit was not a bona fide partner and that the nonprofit could not mandate any distributions or freely sell its interest. Therefore, the donation was an "incomplete gift" and there should be no charitable deduction.
The IRS contested the Ultimate Tax Plan in a Tax Court case. The shareholders in a subchapter S corporation created $2 million in promissory notes and transferred these notes to a charitable LLC. The nonvoting charitable LLC units were then transferred to a qualified nonprofit, and a deduction of $1.6 million was claimed. The IRS audited and denied the deduction. The IRS claimed there were discrepancies in the appraisal and that the transfer to the foundation was not legally valid because the entity was formed after the purported transfer. The case is still pending, however, the Tax Court indicated that it will be an "uphill task” for the taxpayers to prove that they qualify for a deduction.
Another IRS case in 2023 involved the Family Office Foundation. In that matter, the IRS revoked its exempt status because it was assisting with multiple charitable LLC transactions.
Criminal punishments have also resulted from charitable LLCs. In 2024, charitable LLC promoter Meyer was sentenced to eight years in prison for tax evasion and conspiracy as a result of his efforts with the Ultimate Tax Plan.
The IRS continues to warn tax professionals about charitable LLCs. The red flags include promises from promoters to create the charitable LLC, transfer property to the LLC, make loans back to the taxpayers, limit the charity control over LLC assets, use charitable LLC funds to produce life insurance policies for family and repurchase assets from the nonprofit at less than fair market value. The IRS notes it has audited multiple taxpayers who have been involved in these plans. There are an estimated 30 Tax Court cases that involve charitable LLCs.
In 2026, the IRS released FAA 20260401F, outlining charitable LLC problems in detail. The taxpayer created a charitable LLC, transferred cash and securities and then made a gift of non-voting interests to a qualified nonprofit. The taxpayer controlled the LLC, the nonprofit had no management rights and the manager failed to distribute income to the nonprofit as required under the LLC document. The nonprofit could not force distribution of income or sell its LLC units. Because the taxpayer was in full control of the assets in the charitable LLC, the deduction was denied.
The final conclusion is that the taxpayer "obtained a charitable deduction and avoided income tax during the life of the [charitable] LLC, while maintaining complete control over the assets and unbridled use of the assets." As a result, the IRS determined that the nonprofit was not a bona fide partner and the assignment-of-income doctrine mandates that all income must be reported by the taxpayer.
Editor’s Note: There can be valid business exit strategies in which there is a three-part solution. A business owner can transfer a portion of the business interest to a donor advised fund (DAF) and to a charitable remainder unitrust (CRUT) while retaining a partial interest. The business can then be jointly sold. This is a very popular plan and can be completed with substantial safety if the rules are followed including no self-dealing and no prearranged sale. However, it is important for advisors to understand the appropriate methods to document the transfer and substantiate the charitable deductions.
Applicable Federal Rate of 5.2% for July: Rev. Rul. 2026-12; 2026-28 IRB 1 (15 June 2026)
The IRS has announced the Applicable Federal Rate (AFR) for July of 2026. The AFR under Sec. 7520 for the month of July is 5.2%. The rates for June of 5.0% or May of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2026, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”
