2018 was a tough year for small-business owners when it came to understanding the implications of tax reforms introduced by the Tax Cuts and Jobs Acts (TJCA).
Not only were small-business owners unsure about the benefits of the new tax rules, they also had to reassess their tax obligations to find applicable tax breaks after the tax brackets changed.
As we approach the 2019 tax season, understanding tax regulations is still a key challenge for small-business owners and certified public accountants (CPAs) at small firms because of all the changes.
Traditionally, small-business owners turn to accountants whenever big tax or compliance regulations, such as the TJCA, are introduced. This means spending more on accounting fees for tax management and giving up a certain amount of ownership over managing their own finances.
But what if you could successfully manage your taxes on your own at a lower cost?
That’s where tax automation technologies can play a key role; they can help you navigate and comply with complex tax regulations such as the TJCA.
Developments in emerging tech such as robotic process automation (RPA), chatbots, blockchain, IoT, etc. have led to new accounting and finance technologies (fintech) such as tax bots and chatbots.
By adopting tax automation technologies such as tax bots and chatbots, small-business owners and finance managers can maintain autonomy over their own tax management, while also gaining a better understanding of their tax obligations and how to navigate the TCJA to their advantage.
In this article, we compare two tax automation tools: tax bots and chatbot based on their features and who should adopt the technologies, and we give some examples of each.
1. Tax bots: RPA tax automation technology for e-filing tax returns
If you Google the word “tax bots,” there are multiple references to tax-related robotic process automation and bots powered by AI. This indicates that the word “tax bots” has been popularly coined as a term in the finance and accounting world that refers to RPA-based tax automation tools.
A tax bot is a programmable code (bot) based on RPA software that automates manual and repetitive tasks such as filling out a tax form.
Automated data extraction tools, such as RPA software, are the most popular method for managing tax compliance and returns, since they eliminate manual data entry.
Don’t confuse the term “tax bots” with “robot tax,” even though they are often incorrectly interchanged. Tax bots focus on automating data extraction for tax filing. A robot tax refers to a proposed tax that businesses would pay for employing robots instead of humans for a specific task.
Key features of tax bots
Tax bots can help your small business file taxes more accurately with less manual effort through the following capabilities:
- Extraction of financial data from primary sources: Tax compliance is dependent on information from primary data sources such as invoices, balance sheets, profit and loss accounts sheets, etc. To fill in tax forms, you have to separate out expenses and revenues, which involves a lot of manual data sorting. Tax bots extract primary data sources from PDFs and spreadsheets into your tax management software and sort the information accordingly.
- Tax data transfer: After automatically extracting data from primary sources, tax bots connect to tax management tools through application programming interfaces (APIs) to transfer information. For example, if you have expense-related information in a spreadsheet that needs to be included as part of your tax compliance, tax robots can log in to your tax software and enter that data.
- GUI data processing of tax forms: Tax bots function at the interface level. This means you can actually see the tool entering tax data in forms. Once a tax bot has been coded to map financial data to the relevant fields in a tax form, such as 1040A or 1040EZ, the tax bot can automatically fill in the form correctly.
- API integration with tax management tools: Through APIs, tax bots can integrate with other accounting or tax-specific tools to capture primary details related to taxes. For example, if your accounting tool contains information about your total earnings in terms of revenue and profit, all this information can be coded into the tax bot to fill in your tax forms.
- Automatically calculate tax adjustments: Calculating adjusted gross income (AGI) is a key component of knowing your actual tax liability (net tax). Tax bots automatically calculate AGI by subtracting deductions and expenses from the total tax as it transfers this data to the tax form from primary sources such as invoices. This helps to eliminate the need to manually key in these fields to calculate tax adjustments, saving time and reducing the risk of error.
Who should use tax bots for tax management?
Small-business finance managers should consider using tax bots to process high volume tax transactions. Apart from filing a tax return, tax bots can help small-business owners complete multiple tax forms related to property, payroll, sales, etc.
Example of tax bot
Essentially, any type of RPA software could be used to create a tax bot. Since the focus of an RPA platform is mapping the input from primary data sources (in this case, tax forms) to the output (IRS website or tax software), a tax bot can be created to automate manual filing of tax returns.
The image above shows an example of mapping an RPA tool with primary input and output sources for creating robots such as tax bots (Source)
2. Tax chatbots: Automated conversational UI that helps answer tax questions
Chatbots are conversation-based virtual assistants designed to answer specific user questions related to any business function—CRM, sales, HR, taxes, etc.
Similar to tax bots, chatbots include a bot or software program at its core to automate tasks, such as answering tax-related inquiries from a knowledge base, scheduling tax filing reminders, emailing tax forms, etc.
Deploy tax chatbots for FAQ-like tax inquiries to help you save time on repetitive or redundant questions that can be handled by self-service tools such as a chatbot.
The key point of difference from tax bots is that chatbots are designed to interact with a user through auditory or textual data formats. Tax chatbots help users retrieve information of their tax returns and troubleshoot tax queries related to state and federal taxes.
Key features of chatbots for tax management
Chatbots for tax management serve as knowledge portals that enable small-business owners to ask tax-related questions with the help of the following features:
- Natural language processing (NLP): For tax management, most chatbots are adopting emerging technology trends in AI such as natural language processing (NLP) to answer tax-related queries. Through NLP, a chatbot can comprehend tax inquiries made through text or speech inputs. For example, if you ask a tax chatbot for the latest tax legislation based on TCJA, it will run the query through its NLP engine to match your input with the tax management knowledge base and can provide a relevant article.
- Add-ons/integrations: Tax chatbots are mostly available as add-ons that can be integrated with a tax management tool. This means you don’t have to purchase a solution that provides specific chatbot-based tax services. Instead, through an API, you can sync tax information on your tax management tool with the chatbot program.
- CUI data processing: The primary focus of any chatbot is to answer customer questions whether for sales, marketing, taxes, or another topic. Just like Siri or Google Now, a tax chatbot converses with a user through written text in the question box or through audio and provides an answer in a similar format.
- Tax knowledge management system: To answer user queries related to taxes, chatbots need to be integrated with a knowledge management system. Once a user asks a question, the chatbot matches the text string with the data in the knowledge management system.
- Self-service tax kiosks: Since chatbots automate the process of answering tax-related queries, they often don’t need any human intervention to complete basic tasks such as scheduling tax filing reminders. As virtual assistants, tax chatbots serve as self-service kiosks that can help users resolve their tax queries without any human assistance.
Who should use chatbots for tax management?
Small CPA firms with a large clientele can leverage chatbots, especially during the peak tax season.
Not only will they save on hiring costs (peak tax season could require hiring tax professionals on a contract or freelance basis to cope with the large volume of simple tax questions), but they can focus on more complex tax queries about deductibles, tax brackets (for C corporations versus S corporations), etc.
Example of tax chatbot
The image above is a screenshot of a web-based chatbot that uses AI and NLP to provide accurate answers to tax queries (Source)
Tax chatbots have chat window interfaces similar to instant messaging apps that can be used on mobile devices or as pop-ups that display when you open a website.
They can either be cloud and web-based or installed as a separate application on premise.
Recommended actions for opting tax bots or chatbots for tax management
- Select tax bots or chatbots based on ROI by focusing on which key performance indicators (KPIs) you want your tax management to improve. For example, if your key business challenge is time taken for manual data entry filing of tax forms, consider tax bots.
- Test both tax automation technologies by selecting free software trials to assess if the features meet your tax management needs and expectations
- Identify integrations of tax bots or chatbots software that can sync with your current tax management applications.