Generative AI Will Make Tax Firms More Efficient and Profitable

The story is all too familiar. A law firm or accounting partner hands over a complex tax research project to a new associate, who hands over their work product to the partner three hours later. When the client invoice arrives, the partner writes off two hours of the associate’s tax research time.

Every day, law firms and accounting firms write off millions of dollars in tax research time billed by associates. What looks like a 10% to 20% write-off may quickly become one of the largest expenses of a tax firm.

But there’s a better way to make sure clients are happy while minimizing costs for tax practices that may already operate on slim profit margins—here’s where artificial intelligence comes in.

AI’s arrival in the tax world couldn’t have come soon enough. For all the scrutiny it’s brought, AI will help make tax attorneys and accountants more efficient. Organizations will be able to service more clients, reduce write-offs, and capture more “real time” from associates.

Further, efficient AI use could allow smaller firms to compete with larger firms that fall behind on the technology.

Using generative AI to do tax research is a major paradigm shift for the tax industry. Generative AI’s massive ability to “create” is a change from previous AI platforms.

New associates can prompt programs to provide very specific answers about the tax code and relevant case law. Not only will these programs provide the relevant tax cases and information, but they also will “create” summaries of the law that can be used in any legal brief, pleading, or memorandum.

After verifying the work and checking off the ethical requirements that all tax practitioners should abide by, what was once a three-hour research project has been reduced to an hour or less.

With this level of efficiency, tax associates can work on more cases, and partners will write off less time. Firms will become more profitable because the time it takes an associate to do a research project will be more accurately reflected in the client’s invoice.

Unlike before—when a tax firm would write off two hours and bill for one on a three-hour research project—now they will be able to bill for three actual hours of work on three different client matters because their associates are using generative AI.

But progress is more like a pendulum. While some organizations have already embraced AI and are incorporating it in the workplace, others have started to question the overall impact on billing rates to clients.

After all, if a small to mid-size tax firm with lower billing rates can arrive at the “best” tax answer using generative AI, what value will the larger firms provide using the same technology and charging more? Will larger firms need to lower their billing rates to compete with smaller firms who are using AI?

Right now, the sample size is too small and the data is inconclusive. But one can imagine a world where smaller tax practices compete for larger clients because they are using AI in ways their larger competitors aren’t.

More importantly, sophisticated clients will begin to ask if law and accounting firms are using generative AI. Reputable public companies are already starting to ask this in legal requests for proposal.

For all the excitement that AI brings to the table, there are still questions about its overall impact on tax. Generative AI programs will help lawyers and accountants become more efficient and profitable, but the larger-scale questions about the impact on billing rates is yet to be decided.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Travis Thompson is an associate at Sideman & Bancroft, focusing on audits, administrative appeals, voluntary disclosures, and collection matters.

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