AI in Tax Firms: Securing Data and Dodging Risks Like A Pro

With AI tools making waves in the tax accounting world, many firms are jumping at opportunities to automate tasks, boost efficiency, and keep up with the competition. But before you get too excited about all the time AI could save, it’s important to hit pause and take a closer look at the risks involved for awareness and transparency. While AI can be a game-changer, it also brings some serious security and compliance challenges that you can’t afford to ignore.

The Risks of Using AI in Tax Accounting

AI in tax accounting may sound like a dream come true — think about automating the grunt work of data entry and tax calculations. But like anything, there are potential risks that can’t be overlooked.

Hallucinations

One of the biggest risks when using AI in tax accounting is what’s known as hallucinations. This is when AI confidently spits out information that’s just plain wrong. It’s like when you ask an AI model for tax advice, and it sounds spot-on, but then you realize it’s totally inaccurate. AI is really good at processing large amounts of data, but it still has trouble with the nuances of tax laws or complex situations. Sometimes, it can be downright wrong without any clue it made a mistake. That's why it’s essential to double-check everything the AI churns out before you use it with clients.

Poisoning

Another risk is data poisoning, which happens when AI gets fed bad data, either on purpose or by accident. If you give your AI tool incorrect or misleading financial information, it could lead to mistakes that snowball into bigger issues. For example, if your AI model gets inaccurate tax returns or financial statements, it may generate answers based on faulty information. When that happens, you’re not just dealing with bad results; you’re potentially putting your clients at risk. It’s crucial to make sure the data you’re feeding the system is accurate and reliable.

Data Privacy Concerns

Tax firms are full of sensitive data — think Social Security numbers, income info, and all sorts of personal financial details. With AI tools now in the mix, there’s a big concern about how that data is handled. Many AI providers use client data to train their models and improve their tools, which means that the data uploaded could potentially be shared or stored in unintended ways. This raises serious privacy concerns, especially when it comes to Personally Identifiable Information (PII). To keep things secure, you need to make sure the AI platforms you choose are fully compliant with privacy regulations like General Data Protection Regulation (GDPR) and California Consumer Privacy Act (CCPA). That way, you can be confident that your client data is safe, even while using these emerging tools.

Setting Up Safeguards

So, how can you protect your firm and your clients while embracing AI? The first step is creating a clear, solid AI usage policy that covers everything from security to compliance.

Step 1: Vet Your AI Platforms Carefully

Before you dive into using any AI tool, you need to know who you’re working with. Platform vetting is a crucial first step. Ask your potential AI providers the tough questions:

• How do you handle and protect client data?

• Are you fully compliant with privacy laws like GDPR and CCPA?

• What kind of security measures do you have in place?

Don’t just take their word for it — look for transparency in their practices and make sure they can provide solid answers. If they don’t have clear security protocols, it might be time to look elsewhere.

Step 2: Develop an AI Usage Policy for Your Firm

Once you’ve selected your platform, it’s time to establish best practices within your own firm. This is where you create an AI usage policy that covers:

• Who can use the AI tools and for what tasks

• What data is appropriate to enter into the system (spoiler: no PII in public AI models)

• How to double-check AI-generated results before they’re used

• A clear guide for staff on best practices and responsible use

By setting clear boundaries, your team will know what’s expected and how to use AI safely and effectively.

Step 3: Implement Data Privacy and Security Controls

Now, let’s talk about protecting the data that AI tools process. Make sure your AI tools are integrated with the same data privacy and security protocols you already have in place. Here’s what you can do:

• Encrypt your data — both when it's in transit and when it's stored.

• Implement role-based access control (RBAC) so only authorized staff can view or input sensitive information into AI tools.

• Set up regular security audits to identify any weaknesses in your system and tighten up any gaps.

By using these security controls, you ensure that AI works smoothly without putting client data at risk.

Step 4: Monitor and Evaluate AI’s Performance

You can’t just set up AI tools and forget about them. Ongoing monitoring is key to ensuring the systems are working correctly and that they continue to provide accurate results. Regularly test the AI tools against real-world scenarios — like tax returns or client cases — and track their performance. If an AI tool produces errors or unusual outputs, you’ll want to identify and fix these issues before they become bigger problems.

Protecting Client Data While Using AI

When using AI in tax accounting, the protection of client data should always be your top priority. Here are some best practices to follow to ensure that sensitive data stays safe:

Don’t Use Public AI Models for PII

It’s tempting to use AI tools like ChatGPT for quick answers, but if you’re dealing with client PII, never use public AI models for that. These models might not have the best security practices, and the data could end up being exposed or misused. Stick with specialized AI tools designed for tax professionals that come with built-in privacy measures.

Encrypt Your Data Every Step of the Way

Whether you're uploading or downloading data, ensure that it's encrypted to prevent anyone from intercepting it. Use SSL/TLS encryption for all data transfers, and make sure your AI vendors follow the same protocols. This protects sensitive financial and personal data from being exposed during transmission.

Limit Access to Client Data

Not everyone in your firm needs access to every client’s data. Use role-based access to limit who can view or enter sensitive information into the AI system. By keeping access restricted to only those who absolutely need it, you can lower the chances of data being mishandled or leaked.

Get Client Consent for Data Usage

Make sure your clients know exactly how their data will be used when it’s processed by AI tools. Always get their explicit consent before uploading their sensitive information to any AI system. Transparency with clients about AI data usage will help build trust and keep you on the right side of the law.

The Bottom Line: Embrace AI, But Don’t Let Your Data Get Burned

While AI can revolutionize how tax firms operate, it comes with its own set of challenges, especially around security and compliance. By staying aware of the risks and building a strong security and compliance policy, you can minimize the potential downsides. Protecting client data is also essential, so always make sure you’re using secure, encrypted tools and that your staff is well-trained on how to use AI responsibly. With these safeguards in place, you’ll be able to improve workflow efficiency with AI without compromising security or data privacy.

Learn more about the importance of accuracy in tax accounting AI tools, including how to train staff to responsibly and effectively use these tools. View a recording of the AI Accuracy And Security In Tax Accounting webinar or read the Accuracy In Tax Accounting webinar overview.