Using ChatGPT as a tax assistance tool: A practical guide

By Sheneya Wilson, CPA, MS, MBA, founder & CEO, Fola Financial LLC

Questioning whether you need to adopt artificial intelligence (AI) in your tax practice today is like an accountant 20 years ago deciding whether to use tax preparation software or continue to prepare paper tax returns. Thus, putting AI tools into practice should be something that practitioners embrace.

What is ChatGPT?

Think Google, with a human-like consciousness — a search engine with the ability to put information into context and make it more useful. Developed by OpenAI, ChatGPT (chat. openai.com) is an AI-powered language model trained on an extensive dataset, enabling it to comprehend and respond to a wide array of queries.

How to use ChatGPT?

Think of ChatGPT as your brilliant best friend of whom you can ask any question. The more time you spend interacting and communicating with this friend, the better the conversations become and the better advice you’ll receive.

Using ChatGPT can be broken into four steps:

1. Define your objective. Clearly state what you want to achieve by using ChatGPT, such as getting answers to questions or solving specific problems.

2. Provide clear and specific prompts. Ask ChatGPT clear and specific questions or provide detailed instructions to get accurate and relevant responses.

3. Assess quality and evaluate accuracy. Check the responses from ChatGPT to ensure they are reliable and align with what you know or have learned.

4. Iterate to customize output as needed. Make adjustments to your questions or prompts and try different approaches to get better results from ChatGPT.

Now let’s apply these steps in practice.

ChatGPT as a tax assistance tool

Here’s an example scenario:

Kevin, a tax practitioner, has a client who wants to understand the tax implications of the sale of an investment property while in the process of filing his tax returns with Kevin’s firm. Kevin has no prior experience working with this type of client transaction and decides to proactively seek advice from ChatGPT. He walks through the four-step process:

Step 1. Objective: His objective is to gain relevant knowledge of the tax implications of a client’s investment property sale and be able to provide a proper response to the client’s inquiry.

Step 2. Prompt: Kevin enters the following prompt into ChatGPT: What are some questions a tax accountant should ask as it relates to a client looking to gain an understanding of the tax implications of an investment property sale?

ChatGPT-4 output (top 5 answers):

• What was the purchase price of the investment property and when was it acquired?

• Have there been any improvements or renovations made to the property during the ownership period?

• What is the selling price of the property and when was it sold?

• Are there any outstanding mortgages or loans on the property?

• Did the client use the property for personal purposes, such as a vacation home, in addition to rental purposes?

Step 3. Evaluation: Kevin evaluates the output to determine whether these questions are relevant to his objective. Many of them are, so he decides to include them as discussion points during his preparation meeting with the client. Though this response was good, it doesn’t really meet all his objectives. He enters the following prompt to continue his chat: What are some of the common tax implications for a client who sold an investment property during the tax year. Please provide the relevant IRC code for reference.

ChatGPT-4 Output (top 3 answers):

• Capital Gains Tax: The client may be subject to capital gains tax on the profit made from the sale of the property. The specific tax rate depends on various factors, such as the client’s income level and how long they held the property. Relevant IRC code: Section 1221.

• Depreciation Recapture: If the client previously claimed depreciation deductions for the property, a portion of the gain may be subject to depreciation recapture tax at a higher rate. Relevant IRC code: Section 1250.

• Net Investment Income Tax (NIIT): Depending on the client’s income and filing status, they may be liable for an additional 3.8% NIIT on their investment income, including capital gains from the sale of the property. Relevant IRC code: Section 1411.

Step 4. Iteration: Kevin now has a clearer direction to begin researching the tax code and properly advising the client.

Kevin’s experience demonstrates how powerful and useful AI tools such as ChatGPT can be for tax practitioners and firm owners. However, it is important to remember that while ChatGPT can offer valuable assistance, professional expertise and judgment remain crucial in interpreting and applying the information provided by the model — and this is great news for practitioners who seek to leverage technology to propel their success.

Reprinted with permission of the New Jersey Society of Certified Public Accountants.

Sheneya Wilson, MS, MBA, CPA, is the founder and CEO of FOLA Financial LLC. She can be reached at sheneyawilson@folafinancial.com