Technology and tax standards: Understanding new SSTS Section 1.4 — Reliance on Tools

Editor: Rochelle Hodes, J.D., LL.M.

On May 18, 2023, the AICPA Tax Executive Committee (TEC) unanimously adopted the updated Statements on Standards for Tax Services (SSTSs), effective Jan. 1, 2024. The standards apply to all AICPA members providing tax services. Many state boards of accountancy also have adopted part or all of the SSTSs as part of their CPA licensing requirements.

SSTS No. 1, General Standards for Members Providing Tax Services, includes a new rule regarding member reliance on tools used in the provision of tax services. Although the issues addressed by the rule are not new, the TEC deemed it important to introduce a standard that addresses the significant increase in technological tools used in providing tax services. The standard states:

1.4.3. A member should exercise appropriate professional judgment and professional care when relying on a tool.

1.4.4. A member may reasonably rely on tools used in providing tax services to a taxpayer. Use of a tool does not absolve the member of professional obligations under AICPA or other applicable ethical standards.

This discussion highlights the four key elements of the new rule that should be considered when ensuring a member is in compliance with the SSTSs. The rule does not generally provide bright–line tests; therefore, this discussion uses commonly encountered examples to suggest steps a member may take to implement the new rule. These four elements are:

• The definition of “tool” under the standard;
• How to “exercise appropriate professional judgment and professional care”;
• What makes reliance on a tool reasonable; and
• Meeting professional obligations when relying on a tool.

Definition of ‘tool’

Before diving into the mechanics of the rule, it is important to understand what tools the rule applies to. Paragraph 1.4.2 of the introduction to the standard provides the following definition of a “tool”:

For purposes of this section, a tool is a resource used in the provision of tax services. Tools include, but are not limited to, tax preparation software, tax research publications (paper or electronic), tax–related calculation aids, tax planning software, state and local tax aids, online data search engines, data analytics, statistical models, artificial intelligence, and relevant professional publications and resources.

The definition is broad enough to encompass both tools that assist with data gathering and computation and tools that are knowledge–based. Although not necessarily obvious at first, this broad definition is necessary. To demonstrate this, consider two examples.

As a first example, consider tax return preparation software. If asked what tools are used in preparing a tax return, most return preparers will immediately reference their tax preparation software package. Without such software, tax professionals would be required to manually prepare calculations and hand–write tax forms, relying on form instructions and manual checks to complete a tax return. Tax preparation software supplements the return preparer by automating the manual calculations and steps otherwise required. The return preparer types items either directly on a tax form or in a separate intake form, and the software then uses internal programing based on the form instructions to perform form calculations and/or carry the amounts to different locations within the return. The software replaces the need for preparers to perform many manual calculations that would otherwise be required. The standard therefore addresses how and when a member may rely on such a tool.

As a second example, consider a tax research subscription service. Knowledge-based tools, such as tax research software, can be just as important as tax preparation software when preparing a return. In days past, tax return preparers would consult hard-copy sources to answer tax questions. The volume of such sources could quickly result in full tax libraries, which included not only the Internal Revenue Code and regulations but also court cases, IRS rulings, third-party guides, and other sources. These resources are now quickly available and searchable in digital format from various vendors and in some cases at no cost. However, each source and reproduction of a source introduces the possibility of error, whether accidental or intentional. Members need to evaluate their ability to use a particular source. For example, as noted in Paragraph 1.4.6, a subscription-based tax research tool may be more dependable than an article from an independent internet source. The standard therefore sets expectations not just for computational tools but knowledge-based tools as well.

Exercising appropriate professional judgment and professional care

Terms such as “professional judgment” and “professional care” are often used when discussing matters of quality and ethics, but what do they mean? Although neither is defined in the SSTSs, members can look to the explanations for assistance in understanding what is expected of them. Specifically, Paragraph 1.4.7 instructs members to “take reasonable steps to determine that the tools used are appropriate for the intended purpose.” This clarifies that members do not need to understand or review every element of a tool but rather suggests a member should use their judgment in evaluating tools.

For example, assume a member is evaluating whether to use a particular software for preparing not–for–profit returns. The member might first consider whether the software vendor has a good reputation through evaluating customer reviews and, if possible, discussing the software with a colleague. Where possible, the member may also watch video demonstrations or reach out to the vendor for a live demonstration and discussion of how the tool might integrate with other software. When selecting a particular piece of software, the member does not necessarily need to reperform every calculation, but they should take reasonable steps to ensure the output matches their expectations.

What should be noted in this example is that a member is expected only to take “reasonable” steps in performing diligence on tools to be used and then in using that tool. If a member has to recalculate and/or verify every outcome provided by the tool, the member may not be able to achieve any real benefit by using the tool. Members get a benefit only where they can reasonably rely on the tool as defined in the next section of this discussion.

Examples of reasonable reliance for purposes of SSTS ¶1.4.3

How might a member go about determining if reliance is reasonable for purposes of the rule under Paragraphs 1.4.3 and 1.4.4? As a timely example, consider a member who is evaluating the use of a general artificial intelligence (AI) chatbot for assistance with answering a federal business income tax question posed by a client.

As a point of reference, a chatbot is a software application using AI to simulate human conversation for the purpose of answering questions or retrieving information. The member may first ask whether reliance on the chatbot’s answer without review is reasonable. The standard would conclude it is not. As stated in Explanations Paragraph 1.4.8, “Tools should be used to enhance or improve the member’s understanding of a tax issue, not to supplant the member’s professional judgment.” If the member relied on the chatbot’s answer without further review, the member would be replacing their own judgment with that of the chatbot. The member, however, remains responsible for the answer reached, and therefore the member should take steps to review the chatbot’s work as they would for any work prepared by another individual. Depending on the particular situation, this might include steps such as checking the logic of the chatbot’s answer, confirming sources identified by the chatbot, and reviewing facts and the application of law to those facts. Confirming sources may be particularly important in this situation, as there have been several reported instances of a chatbot “hallucinating,” or making up information, including situations where a chatbot used to prepare a court submission was found to have hallucinated and made up court cases that did not exist or misstated the facts of a real case (see, e.g., Gauthier v. Goodyear Tire & Rubber Co., No. 1:23–CV–281 (E.D. Tex. 11/25/24) (Mem. and Order)).

Along with the scenario above, here are some other situations a member may encounter when using AI:

• The previous example assumes the AI chatbot provides citations that can be reviewed to support its conclusions. If no citations are provided, the member should ask the chatbot to provide its sources and/or seek supporting authority before deciding whether to rely on the conclusions.
• A member may use an AI chatbot or similar tool to confirm the member’s conclusions on a particular issue. It may be reasonable to rely on the tool as a second reviewer, but the member should take care to verify that the tool is using appropriate sources to confirm the results and that it is not just providing confirmation bias to the member.
• Some AI chatbots may also be able to calculate amounts, in addition to answering questions. Members should check any computed results, following a similar approach as they would when reviewing any calculated amounts.

Although the issues regarding use of an AI chatbot can be unique to the technology, the general concept illustrated by the example applies to any tool a member uses. Members should reasonably rely on a tool only when they have completed a review process to confirm that the tool’s results match expectations. The level of review will depend on the individual facts and circumstances of a given situation and will vary based on the tool used. For example, although a detailed review of sources is likely appropriate when reviewing work completed by an AI chatbot, the use of standard calculation functions within a spreadsheet likely does not need a detailed review.

Meeting professional obligations

Finally, members complying within SSTS Section 1.4 need to ensure adherence to other standards. Continuing from the prior example, assume the member completes a reasonable review of the answer provided by the chatbot and is satisfied that the answer is correct. Although the member may have met their obligations under Section 1.4 to rely on a tool only when such reliance is reasonable, if they are using the answer to take a position on a tax return, they must also ensure the chatbot’s answer meets the rule regarding tax positions included in a return prepared by the member under SSTS Section 2.1. This rule states that for a federal income tax return, a member is generally prohibited from preparing a tax return that includes a tax position if the member does not have a good–faith belief that there is at least a realistic possibility of the position’s being sustained administratively or judicially on its merits if challenged. The member must also meet any higher written standard of the applicable taxing authority. Although the member may use the AI chatbot to help identify whether and to what extent there is support for a tax position, the member must exercise their own professional judgment in concluding whether there is support that satisfies the requirements of Section 2.1.

Exercising professional judgment and due care

SSTS Section 1.4 provides important guidance to members in formally allowing reliance on tools. However, to satisfy the standard, that reliance must be reasonable based on the use of professional judgment and due care. Additionally, members should take a comprehensive view of their professional responsibilities when determining whether results from a tool may be relied upon.

Editor

Rochelle Hodes, J.D., LL.M., is principal with Washington National Tax, Crowe LLP, in Washington, D.C.

For additional information about these items, contact Hodes at Rochelle.Hodes@crowe.com.

Contributors are members of or associated with Crowe LLP.