Tax compliance trends: AI can analyze extensive datasets to detect patterns that signal potential tax issues, says expert
By scrutinizing vast datasets, AI can identify anomalies and suspicious activities that can signify fraudulent behavior.
The digital age has transformed the structure and operations of tax administrations; however, embracing digital technologies requires reassessing traditional models and helping create agile and adaptable systems. While AI (Artificial Intelligence) has become widely adopted and popular, marking a significant milestone in this transformation, this shift made training and upskilling human resources crucial for managing and proficiently utilizing advanced technological tools.
Varahasimhan Srinivasan, Director of Engineering at Avalara, informs that this has also paved the way for the prominent role of AI in tax compliance in 2024. "According to a study examining 80 tax administrations worldwide, 44 countries are adopting AI to bolster tax compliance, mitigate fraud, and enhance overall efficiency. The primary motivations behind government investments in AI for optimizing tax administration activities include the launch of virtual assistant services (61 per cent), assistance to tax officers in making administrative decisions (34 per cent), and the implementation of risk assessment processes (64 per cent)," he avers.
AI: Harmonizing Harmonized System (HS) Classification
Companies can now automate the categorization of Harmonized System (HS) codes by utilizing AI, which adjusts as HS code regulations change, he informs.
"Incorporating AI into HS code management is transformative, leveraging its learning capabilities to make precise predictions. AI-driven product taxonomy enables more accurate categorization forecasts based on category ID and taxonomy tags while employing machine learning for product classification, preventing costly manual errors," he says.
The Director of Engineering at Avalara states that manually managing various products from diverse countries and retailers poses a considerable risk of errors, and adds, "An AI-powered system utilizes manufacturer details and product descriptions to automatically ensure customized classification and accurate tariff codes. With AI's ability to process large volumes of tax information and utilize extraction techniques, businesses can realize significant efficiency gains, potentially saving up to 30–40 per cent of the time typically expended on such tasks."
AI Trends in Tax Compliance
Experts believe that AI's profound impact on the accounting industry in 2024 will automate routine tasks and redefine roles, with a heightened focus on strategic analysis. Talking about AI's capabilities, Srinivasan informs, "AI can enhance tax compliance by analyzing extensive datasets to detect trends and patterns that signal potential tax issues. This empowers businesses to tackle compliance issues preemptively, mitigating the risk of costly and time-consuming tax assessments."
He says that tax authorities can leverage AI for conducting tax audits, particularly in jurisdictions where AI is employed to flag potential fraud cases. And adds that by scrutinizing vast datasets, AI can identify anomalies and suspicious activities that can signify fraudulent behavior.
"Numerous European Union (EU) member states have adopted AI to detect tax fraud. Tax authorities successfully detected an estimated 60 per cent of tax fraud cases in a specific EU country using advanced technologies. This underscores the potency of AI and its widespread utilization across various geographical regions," he informs.
Immense potential for efficiency and transparency
While integrating AI, ML, and Blockchain technologies into tax systems offers immense potential for efficiency and transparency, experts feel that it also presents significant challenges. "Tax authorities must address data privacy and security concerns while investing in infrastructure and training. Companies need help managing nonintegrated systems to avoid obstacles such as skill shortages, high costs, and the need to manage nonintegrated systems. To navigate these challenges effectively, businesses must carefully assess their resources and consider partnering with third-party experts to support their technological advancements while maintaining focus on critical areas of operation," he sums up saying.
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