Accounting for Innovation

Transforming Tax with AI: Opportunities and Challenges for Firms and CPAs

• Jody Padar & Matt Tait • Season 4 • Episode 3

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In this episode, Matt Tait and Jody Padar explore the transformative impact of AI on tax preparation and accounting. From the accelerated development of tax software using AI to the practical applications in pre-tax work and tax planning, Jody shares her extensive experience in building AI-driven tax solutions. Listen to this episode to hear the potential speed of AI adoption among small and medium-sized businesses, challenges from legacy vendors, and opportunities for innovative startups in the tax software space. 

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Welcome to the Accounting for Innovation podcast, where we explore cutting edge strategies and insights into the world of accounting and finance. Presented by Decimal and the Radical CPA, each episode dives deep into industry trends. Whether you're a seasoned professional or a budding entrepreneur, join us as we unpack key concepts and share practical tips to drive success.

Matt Tait:

Welcome to today's episode of Accounting for Innovation with your co-host myself, Matt Tate and Jody Padar. Today I am excited because I have very little contextual information to be able to help this discussion, but Jody is an expert. So today we're gonna talk about AI for tax because to me and, and our teams are doing this at decimal AI is reducing the burden of tax season. Prep. It's enabling more strategic planning. It's making the work easier. And one of the craziest things I've always thought about the profession is in other jobs, people measure your time by how many years you've been at a company. In an accounting firm, it's how many tax seasons. So Jody, how are we gonna use AI to make that? Less impactful.

Jody Padar:

Oh, I love AI in tech. So, uh, to give people a little bit of background, if they haven't, you know, been around me for a while is my last full-time position was with April Tech Software and April Tech software built. Um, tax software to compete with, um, TurboTax. So on the consumer side, I was employing number one and I worked, um, hand in hand with the engineers to use AI to build tax software from scratch. Now, the way we used AI is we used the language models to read the forms instructions and to code forms faster, and we were able to get from, uh. Nothing or zero, zero federal in all no states to have complete federal coverage. Now granted there was a limited form set to it in three years, which is unheard of, right? Oh yeah. When you think of like, and we had, I don't wanna say a handful of engineers'cause we, we did have a team, but we had nowhere near the team that any of the other legacy providers have to develop software. So that's how fast. Um, the compliance based software is going now and using AI to develop it. And now, and that was even before like kind of chat GPT because that began in the end of 21 and the models are that much smarter now. So, but now when you think about it in the professional side, because we built it in the consumer side and professionals are always a little bit more, you know, um. Uh, picky about, um, now when you look at it on the professional side. I can honestly say, guess what? It was done on the consumer side. It can be done on the professional side. So it's now a question of who and how fast are they gonna get there. And when you look at all the pieces of tax software, it's not just the filing side, which is what I did at April. It's the gathering of documents. It's the kind of pulling it all in the, I'll call it the pre-tax work in a cas, they call it pre accounting, which is all the bookkeeping in the receipts. So how do you get all that pre-tax work done? And there are already. Tools on the market that are starting to kind of redefine what that organizer is like. An organizer on steroids, right? Yeah. And I think that's what's exciting because that's like the first step. And then once you get all that data in, and again, we're going unstructured to structured data, now you can populate tax forms fairly easily and you can get to filing. And so I would. Guess in the next few years we will have complete software that will be able to file using AI significantly. And you know, in the professional side there's like black ore who, nobody really knows what they do, but they've raised like, I think$60 million or some crazy amount. And yet. Nobody has really seen them, their software work yet. But I think that's interesting. So I think there's, yeah, I do too. An opportunity there. Um, I also think that I've had, well I think, I know I've had three additional, um, uh, seed founded startups come to me directly asking for help with tax software. Um, also. I win, just acquire taxa and they're in, they're kind of exploring the space. So that's like five that I can say today that are gonna get there. Now whether they get there in one year or five years, I don't know, but it's coming and it's coming quick. And then you, again, you have the, the kind of the pre-tax softwares that are kind of on the cusp who are like starting it as well, and. And then there's the, um, the planning software, right? So we didn't even talk about like tax planning software, right? Yeah. So you have, I think, true prep ai. Um, you have, uh, other tax planning softwares that are like they're building to help us do tax planning, which I actually think is a little bit. Easier even than compliance to use AI to do it. So I agree. The, the opportunity and, and then last but not least, we got research, right? And we have um, blue Jay who is like killing it on the tax research slide. They're like everywhere now and they're at all the states and they really make tax research super simple. So, yep. Tax is actually, I think, one of the easier things to do with ai. Um, because it's based in language. Because it's law and it's language, right? And it's, it's yes or no. There's less gray in it. I mean, there's still gray, but there's, I'll say there's a little bit less gray. But anyways, I'm excited about it. Matt, what's your take on it? That was a lot.

Matt Tait:

Oh no, I agree. Uh, not that it was a lot. It was a lot, but it was great. I think that it's awesome. I mean, what, I was talking to my team the other day and I said, you know what my ideal is? We get a last year's tax return from a client. I. Then we just watch software, reach out to them and tell them exactly what we need from them, uh, exactly what states they're gonna file in. It follows up with them in a good mannered, humanistic way. It compiles all the information, it fills out the forms, and you guys are just advising them on a few things. So that to me is, is the most amazing outcome for where I think we're gonna get to pretty quickly. And the reality is. I agree with you. It's easier. I think you're gonna see AI adopted fast. Through at least SMB tax than you will in Cass and bookkeeping because it is so legalistic in Cass and bookkeeping. It's a very flexible kind of program that you can do. Everybody's different. You have different charts of accounts, desires, wants, businesses, industries, but can tax is tax and it's pretty well regulated. You do have some gray areas and you know, I think. Those of us that pay taxes should always have a rule of trying to legally pay as few as possible. But I think as you really look at it, there's a lot of of opportunity out there. And you know, the tech stack that we look at is you want the Blue Jays for research. And we use tax dome and, and its capabilities and we're even looking at how do we maybe replace that with something newer and, and then your filing side. I think there's a lot of opportunity out there.

Jody Padar:

Well, I think it's exciting. I think the hard part is, is the legacy vendors have owned the space for so long and are. You know, not so accepting of new players in the market. And I think the hard part about it is too, is that CPAs have to adopt. They have to kind of test it. And, and that's where that, that's the hard part because if these companies are VC backed and funded, they wanna show adoption. And if CPAs don't adopt the new software and they don't try it out because tax season is so busy and they don't have time for it and all of these things, then what could happen? And I'm gonna play like devil's advocate here, right? What happens if. These companies get all this money to change things and nothing changes because we have no adoption because the CPAs or the tax preparers have kept their heads down and not changed. And to me, that's the hard part because tax software is so complex and it does take a lot of money to get there. It does. And you have to show adoption for VC to continue the funding. And so. So anyway, so that's my, that's the other side of it that actually concerns me. Whereas bookkeeping, the adoption is already here. It's already moving. Like I don't, I, I think there's a huge opportunity for tax, but I also wonder is will it continue or will tax people like almost heard it and that that wouldn't be blue Jay.'cause Blue Jay I think is solid and already here. But I'm talking about truly from the tax prep side.

Matt Tait:

Well, that's because Blue Jay solves a problem. That is the research side of things. It just makes that easier without liability, really. Like any other thing that the liability, the risk angle hits accountants and as somebody that comes from the tech industry a little bit. I think it's very hard to build technology and accounting because in in most technologies, you see the kinda hockey stick growth curve go like this. Mm-hmm. In accounting, it goes like this and it does have that. We saw bill.com is a great example in kind of relatively recent history and RAMP is another one, but the reality is you have a much longer period where the industry gets comfortable. The problem is, is that technology is changing and improving so fast. What I wonder is actually gonna happen is you're gonna have this, one of the dichotomies in tax that I think has always been fascinating is if you bring out new college grads and put them in a big firm, you effectively are telling them, Hey, we need to take your technology brain. Your experience with technology, put it in a box and dumb you down to now use the tax software that you're gonna use at this big firm. And I think what you're gonna start to see is these younger generations of accountants that are gonna hop out and say, I'm not doing that. I'm gonna start to use this and you'll see more. I wonder if we're gonna see more of a grassroots implication on tax, where you have the, uh, more the younger generations are saying, I'm not gonna do all of that. I'm gonna use this stuff, get paid similar wages, and just make a ton more money for a period of time.

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Jody Padar:

Yeah, so the, the only hard part about that is tax is so big and so complex that it, you know, but the other thing is, I, I guess too, on the other side of it is the tech costs are coming down significantly and even like, so. What's the ability to develop tax software, faster professional tax software faster. And it's a seasonal business, so that's the other side of it too, right? Like you only have tax season once a year, so it's really hard to iterate through. So it. It's

Matt Tait:

gonna be interesting that seasonality, does it provide an opportunity? I was actually asking our tax team this the other day, does it provide an opportunity to test on the fall tax season versus the spring tax season? You know, looking at all the extensions and using those as your opportunity to maybe test and run parallel processes versus trying to do it when everybody's so busy.

Jody Padar:

So the yes and no. So the hard part is, is the development has to be approved by every state regulatory agency and all of that stuff happens at the beginning of the year. So if you haven't developed it to get approvals, then it doesn't matter'cause you can't continue to iterate. So, so again, that's why like. Tax software is so difficult to build. It's not just the software, it's the regulatory agencies, the IRS and every state Department of revenue, um, or revenue agency that creates the bottlenecks and the. The the rules that don't allow you to iterate fast enough. So not only do you have the CPAs who are holding you back, you have all the regulatory agencies who are holding you back. Hence why there's only three tech software providers. Like the big ones, right? You think they might

Matt Tait:

all be in cahoots?

Jody Padar:

It's, they were the early ones. They got in and they, they figured it out and that's why they've been able to kind of, you know, hold the market. So, but like I said, we have tax, well tax that got acquired by IWiN, so, but they're in it now. Um, you have Hub, hub Sync, I think. Um, they're in it at, again, at the bigger firm level. So like, and then there's the three new ones and like, it seems like every other day someone's calling me to say, Hey, I wanna build tax software, so

Matt Tait:

go for it.

Jody Padar:

So, so maybe it's come, maybe it's coming faster than we think, but again, I think it'll be interesting. But that, that's my word of warning. If you truly want tax software, we as a profession, we as tax preparers are gonna have to help iterate through and get. Let some of these softwares actually be viable, because if, if we're not, then guess what? The, the legacy providers are gonna continue to do what they do.

Matt Tait:

So today you have, uh, a lot of people are thinking, where do I start with AI and tax? Where do you have them start?

Jody Padar:

So I would start on the pre-tax work. So I think it's true prep.ai is there, I think, I think it's Sobon, right? Um, is one of, uh, I, and I think there's a couple others that are really on the pre-tax. Work. Um, and, and I think that's where you start. And then I think you start in research, um, and get used to like Blue Jay. Um, I think you can use things like, um, I think it's tax plan iq, right? For projections and, and things like that, right? So I, those are the ones that are like already like. Somewhat established, right? When you think of AI and tax, but they're not in compliance. They're in the surrounding area. So they're either in projections or you know, research.

Matt Tait:

I would agree. Kind of break things up and take out the unregulated aspects that are hard to do and start putting stuff in there. Make your life easier. And when the regulated aspects start to provide opportunities, then see and test. And I think getting back to get your hands dirty and start trying things out, testing it out, and um, you know, I think the Blue Jays of the world provides so much opportunity for people that have not been able to have access to information in the ways that. Bigger firms have, and you're democratizing information. And you as a small firm or as a single accountant in a bigger firm now have access to look way smarter than you ever have in the past by leveraging ai. And I think that's really cool.

Jody Padar:

And absolutely make sure you're pricing for it and you're charging for it, right? Just because it a hundred percent, two seconds to find the answer doesn't mean you shouldn't charge for it. And I think the other thing is, is even when we talk about accounting to get to, um. Tax. Think about if you aren't doing taxes and you wanna do some like quick writeup work, you could throw a bunch of bank statements into chat, bt, and you could get an Excel spreadsheet out and you can manipulate that data really quick to get to. I would call a quick and dirty tax return on a Schedule C, right? Oh yeah. So like. The way to manipulate data to get it into a tax return. Forget about even like the 10 90 nines and all that stuff you're collecting. Just think about, you know, someone who has a simple Schedule C with 12 bank statements that now you have the ability to. By using AI to turn that stuff into a simple trial balance that you can manipulate in Excel and have that take you, you know, 10 minutes as opposed to re-keying everything or trying to hunt down a bank login or doing something like that with it, right? Like you can now take a PDF and make it into, again, taking unstructured data. Making it structured

Matt Tait:

a hundred percent

Jody Padar:

and you can make it into a simple trial balance really quick to get into a Schedule C return. So, um, you know, I'll say that's the, the, the hack of ai right? Versus like kind of this big software stuff. But I, I think that's the stuff firms need to think about too is like, what are all the still trying facts that you can, you can use AI to do, you know, your job easier as these other tools continue to evolve.

Matt Tait:

How do you find the hard parts of your job and make them easier? It's a, it's something we've all been trying to do for our entire lives, and now AI gives us more capability. So I think it's awesome. I think we're gonna see a lot of tax or AI and tax and cast and workflow. AI is, is coming for everything, and it's just gonna make our lives easier and better. And Jody, I'm excited to talk about more aspects of that, more areas where we're gonna see it, uh, in our episodes to come.