What are AI hallucinations?By: National Association of Tax Professionals
November 6, 2024

Gary Thomas, through his attorney, went to court to challenge the IRS’s disallowance of his unreimbursed employee business expenses for 2016 and 2017. However, this isn’t about Thomas and the deductibility of his expenses; this is about his attorneys and their use of artificial intelligence (AI) when preparing their pretrial memorandum.

Thomas’s attorney, being new to the firm, had a new paralegal draft the pretrial memorandum for her, which is fine. However, the attorney signed the document without reviewing it and it is her signature that acts as her certification, making her responsible for its content.

Upon review of the pretrial memorandum by the court, it was unclear to what extent AI was used to prepare it because it had the hallmarks of being prepared with the assistance of a large language model (LLM), or AI.

LLMs are prone to “hallucinations.” AI hallucinations occur when a LLM perceives a word pattern and generates output that is inaccurate or even nonsensical. After reviewing the pretrial memorandum, the court informed Thomas’s attorney that it was unable to locate three of the four cases cited.

The court’s initial reading showed it conformed to what was expected. However, here is the where the issue comes in. In preparing for trial, the court discovered that none of these cases actually existed as cited, nor did their citations stand for the propositions they were cited for, meaning they were AI hallucinations. For example:

Case Cited AI Hallucinations
Schluter v. Commissioner, T.C. Memo 1998-269, showing the Tax Court held that an employee who was required to submit business expenses for reimbursement, but who was not reimbursed by the employer, was entitled to deduct those expenses. Schluter v. Commissioner, T.C. Memo. 1998-269, is actually T.C. Memo. 1970-67, a dependency exemption case, and T.C. Memo. 1998-269 is actually Schmitt v. Commissioner, a method of accounting case.
Meneguzzo v. Commissioner, T.C. Memo 1969-15, showing the Court allowed deductions where the employer had an obligation to reimburse the employee, but reimbursement was not made. Meneguzzo v. Commissioner, T.C. Memo 1969-15, is actually 43 T.C. 824 (1965), a tip reporting case and T.C. Memo. 1969-15 is actually B-E-C-K McLaughlin & Assoc. v. Renegotiation Board, an excess profits case.
Gagliardi v. Commissioner, T.C. Memo 2011-194, stating that if the taxpayer provides credible evidence that the expenses were incurred and not reimbursed, the burden may shift back to the IRS to prove that the disallowance of the deduction was correct. Gagliardi v. Commissioner, T.C. Memo. 2011-194, is actually T.C. Memo. 2008-10, a gambling loss case, and T.C. Memo. 2011-194 is actually Layton v. Commissioner, a collection case.

With regard to AI, professionals, including attorneys and tax preparers, have a variety of tools in their “toolbox.” Those we are most familiar with include software products, computers, printers (useful also in paperless offices), phones and office supplies. The new tool now available to professionals is AI.

However, professionals cannot blindly rely on the AI-generated results. To be certain the information generated is accurate, it is necessary to confirm the output.

As tax practitioners we have our due diligence and ethical standards we must maintain per Circular 230, §10.22 and §10.50. For example, if we utilize AI as a tool, we must not take it at face value without confirming its findings. That can be done through various sources such as those found at the IRS website.

In addition, NATP has a variety of tools such as our on-demand webinar on how to do tax research, Enhancing Your Tax Research Skills: Tools, Strategy and Documentation.

AI technology
Artificial intelligence
Tax research
Large language model (LLM)
AI hallucinations
Tax Court
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The gig economy boom: tips and tricks for tax prosBy: National Association of Tax Professionals
November 4, 2024

Unlike traditional employees, gig workers usually receive Forms 1099 instead of W-2s, which means they’re responsible for their own tax withholdings, self-employment taxes and quarterly estimated payments.

The shift from employee to independent contractor requires you to adapt to new complexities in income reporting and tax planning. Additionally, gig workers often have diverse income streams, varying expenses and unique deductions that differ from traditional employment.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: Can funds contributed to a GoFundMe campaign be claimed as a charitable deduction?

A: Only if the donation is made to a qualified 501(c) organization.

Q: If a taxpayer receives both a Form 1099-K and a Form 1099-MISC, isn’t there a chance of double-reporting the same income?

A: Unfortunately, yes. There have been cases where individuals received both forms for the same income.

Q: If I’m listing my property as a short-term rental using a website, why do I need to take the mortgage on the property into account?

A: Some mortgage lenders may not allow you to rent out a property that’s financed with a homeowner’s mortgage.

Q: Are funds received from a GoFundMe campaign taxable to the recipients?

A: GoFundMe payments are generally not taxable to recipients, but the organizer might sometimes receive a Form 1099-K.

To learn more about tax reporting for gig income, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

Tax education
Gig economy
Form 1099
Self-employment taxes
Independent contractors
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You make the callBy: National Association of Tax Professionals
October 31, 2024

Question: John is preparing to meet with two of his potential clients, Robert and Steve. Through their conversation on the phone, John learned that Robert owns a tax-exempt LLC and Steve is a minister who is responsible for the administration of his church and ensuring it complies with its reporting obligations. The two gentlemen are confused as to whether they need to file beneficial ownership information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN). They heard that all tax-exempt entities were exempt from BOI reporting requirements. What should John tell them?

Answer: Not all tax-exempt entities are exempt from BOI filing. John, as a tax preparer, should provide the two clients with the following information.

Beginning Jan. 1, 2024, the federal Corporate Transparency Act (CTA) requires certain types of entities to file a BOI report with FinCEN, a bureau of the U.S. Department of Treasury. The CTA does not distinguish between for-profit and nonprofit entities with regard to BOI reports. Generally, three types of tax-exempt entities qualify for the exemption; they are §501(c) organizations, §527 political organizations and §4947 trusts. If your tax-exempt organization is not one of the three types of exempt entities and meets the definition of a reporting company, you still need to file a BOI report.

Per CTA, every domestic corporation, LLC, or other entity set up in compliance with the secretary of state or any foreign entity formed under the law of a foreign country and registered with the state in the U.S. is required to file a BOI, unless they qualify for one of the 23 exemptions set forth in the CTA. [31 CFR 1010.380(C)(1)]

Given the scenario presented to John, if Robert has his own tax-exempt LLC (which is not one of the three types abovementioned), and was created by filing with a U.S. state, he will still need to file. For Steve’s church, he likely does not need to file a BOI report as it is a §501(c) organization.

To confirm entity’s exempt status, taxpayers should go through the questions and criteria for each type of exempt entity listed under BOI Small Compliance Guide v1.1 (fincen.gov) and Beneficial Ownership Information | FinCEN.gov.

Federal tax research
Tax season
Tax professional
Tax preparation
Tax planning
Tax education
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