THE DANGERS OF USING AI TO DO YOUR TAX RETURN

The dangers of using AI to do your tax return? What dangers? Well…. We all know that artificial intelligence has become remarkably accessible. Today, anyone can ask ChatGPT, Gemini, Copilot, Claude, or another AI tool a tax question and receive an instant answer that appears authoritative and well researched.

That convenience creates a real danger.

Many taxpayers assume that because an AI system sounds confident, cites legislation, and provides examples, the answer must be correct. Unfortunately, that assumption can prove expensive. AI often produces answers that contain subtle errors, incorrect assumptions, outdated information, or references to the wrong tax jurisdiction. In some cases, the answer may seem accurate on the surface while completely misunderstanding how New Zealand tax legislation actually works.

The risks increase significantly when business owners, property investors, landlords, sole traders, and trustees rely on AI instead of obtaining professional advice.

A recent example involving boarder income and Inland Revenue’s standard-cost method highlights exactly why taxpayers should approach AI-generated tax advice with caution.

A Real Example of AI Getting New Zealand Tax Rules Wrong

A taxpayer asked an AI system about the Inland Revenue standard-cost method for boarders.

The AI correctly identified that the current weekly standard cost is $245 per boarder. However, it then stated:

“Income is taxable only for the amount you charge above the weekly standard cost.”

At first glance, this statement looks reasonable. Unfortunately, it oversimplifies Inland Revenue’s rules and may produce the wrong answer.

The critical Inland Revenue wording states:

“If your income from boarders or home-stay students is higher than your total costs you need to pay tax on the difference.”

The phrase “total costs” matters.

Under the standard-cost method, taxpayers do not simply compare board received against the weekly standard-cost amount. Inland Revenue’s calculator requires additional information, including:

• Total boarder income
• Number of boarders
• Number of weeks
• Housing costs
• Transport costs (where applicable)

The housing-cost component can materially affect the outcome.

As a result, the correct analysis requires a comparison between:

Total boarder income and total standard costs

Those standard costs may include:

• Weekly standard costs
• Housing standard costs
• Transport standard costs (where applicable)

An AI system that only considers the weekly standard-cost amount may reach the wrong conclusion.

Why Small Tax Errors Matter

Many AI mistakes involve oversimplification rather than complete fabrication. That makes them particularly dangerous. When an AI gives a completely absurd answer, most people recognise the problem immediately. However, when an AI answer is 90% correct, users often accept the remaining 10% without question.

In tax, that final 10% frequently determines whether:

• Income is taxable
• An exemption applies
• A deduction is available
• A return requires amendment
• Inland Revenue imposes penalties

Tax legislation often contains definitions, thresholds, exceptions, elections, and alternative calculation methods that significantly affect the outcome.

AI systems regularly miss those details.

The Boarder Income Example Explained

Consider a homeowner who receives:

• $300 per week from a boarder
• Total annual income of $15,600

An AI might calculate:

• Standard cost = $245 × 52 weeks = $12,740
• Taxable income = $2,860

The homeowner might then include $2,860 as taxable income.

However, the housing standard-cost component might add another $4,000 of allowable standard costs.

The calculation becomes:

Item	Amount
Boarder income	$15,600
Weekly standard costs	($12,740)
Housing standard costs	($4,000)
Net result	($1,140)

 

In this example, the income does not exceed total standard costs. The outcome differs entirely from the AI’s answer. The taxpayer may have no taxable income at all under the standard-cost method.

Now, these are hypothetical numbers but not too far from reality.  You see? A seemingly minor misunderstanding has now produced a completely different tax position.

AI Often Sounds Certain Even When It Is Wrong

One of the biggest challenges with modern AI systems involves confidence. AI does not necessarily understand tax law in the same way a qualified accountant or tax specialist does. Instead, it predicts the most likely sequence of words based on patterns in its training data. As a result, AI regularly presents uncertain conclusions with absolute confidence.

It may state:

• “You can claim this deduction.”
• “This income is exempt.”
• “You do not need to declare this.”
• “The law allows this treatment.”

Yet the legislation may contain qualifications that the AI omitted entirely.  Many users fail to recognise the difference because the response sounds professional. The confidence creates a false sense of security.

AI Frequently Hallucinates

Tax professionals increasingly see AI-generated answers that cite legislation, court cases, IRD statements, or interpretations that simply do not exist. This phenomenon is commonly known as hallucination.

Examples include:

• Invented section references
• Non-existent case law
• Incorrect IRD publications
• Outdated rates or thresholds
• Imaginary exemptions
• Misquoted legislation

Sometimes AI creates links to websites that look genuine but lead nowhere. In other cases, AI cites a real source but misrepresents what the source actually says. A taxpayer who accepts those references without verification may unknowingly adopt an incorrect position.

AI Often Confuses Tax Jurisdictions

New Zealand taxpayers face an additional challenge. Most AI systems train on enormous volumes of international content.

As a result, they often blend information from:

• New Zealand
• Australia
• United States
• Canada
• United Kingdom

The answer may appear relevant while relying heavily on overseas legislation.

This problem occurs frequently with:

• Property taxation
• Capital gains
• Home office claims
• Trust taxation
• Rental deductions
• GST rules

A deduction available in Australia may not exist in New Zealand. A tax-free gain in the United States may remain taxable here. An AI that imports overseas concepts into a New Zealand fact pattern can generate entirely incorrect advice.

Inland Revenue Expects Taxpayers To Get It Right

Many taxpayers assume AI provides a defence if a mistake occurs. That assumption creates another significant risk. Inland Revenue generally expects taxpayers to take reasonable care when preparing tax returns. The fact that AI generated an answer does not automatically excuse an error.

If Inland Revenue reviews a return and discovers mistakes, it may still assess:

• Additional tax
• Interest
• Late payment penalties
• Shortfall penalties

The responsibility remains with the taxpayer:

You sign the return.

You lodge the return.

You remain accountable for its accuracy.

Gross Carelessness Can Lead to Significant Penalties

The Tax Administration Act contains shortfall penalties for taxpayers who fail to meet their obligations.  One category involves gross carelessness. Gross carelessness generally involves conduct that falls well below the standard expected of a reasonable taxpayer. Blindly accepting AI-generated calculations without checking them may create risk, particularly when the answer relates to a complex tax issue. A taxpayer who relies on an obviously incomplete or poorly supported AI response may struggle to demonstrate that they exercised reasonable care. Every situation depends on its facts, but Inland Revenue expects taxpayers to make genuine efforts to ensure correctness.

Abusive Tax Positions Carry Even Greater Risk

The consequences become more serious when taxpayers adopt aggressive tax positions. New Zealand’s tax rules contain penalties for unacceptable positions and, in more serious situations, abusive tax positions. These penalties can become substantial.

Taxpayers sometimes use AI to search for:

• Tax loopholes
• Hidden deductions
• Strategies to avoid tax
• Grey areas in legislation

AI may confidently suggest arrangements that sound plausible but have little or no support under New Zealand law. Some responses effectively stitch together fragments of legislation and produce a conclusion that no tax professional would endorse. Following those suggestions without proper advice can expose taxpayers to significant financial consequences.

AI Cannot Apply Professional Judgement

Tax law rarely involves simple arithmetic. Professional advisers add value because they exercise judgement.

An experienced accountant considers:

• Legislative intent
• Relevant case law
• Inland Revenue interpretation statements
• Official guidance
• Industry practice
• Factual circumstances
• Areas of uncertainty

AI often struggles with those judgement calls. The technology may identify applicable rules but fail to recognise the importance of a particular exception. It may miss a key fact that changes the outcome. It may overlook recent developments or interpretive guidance. Professional judgement remains difficult to automate.

AI Has a Valuable Place in Tax Administration

None of this means taxpayers should avoid AI entirely. AI can provide enormous benefits when used appropriately.

For example, it can help:

• Summarise legislation
• Draft correspondence
• Explain concepts in plain English
• Organise records
• Generate checklists
• Identify questions to ask an adviser
• Summarise IRD publications

Many accounting firms now use AI tools internally to improve efficiency (we do). The key point involves understanding the difference between information and advice. AI can assist with research. It should not replace professional review for material tax decisions.

How To Use AI Safely

If you choose to use AI for tax-related matters, follow some basic safeguards.

Always:

• Verify information against Inland Revenue guidance
• Check legislative references
• Confirm calculations independently
• Review quoted sources
• Ensure the answer relates to New Zealand
• Obtain professional advice for significant transactions

Treat AI as a research assistant rather than a tax adviser. Ask it questions. Use it to explore issues. But do not assume every answer is correct.

THE DANGERS OF USING AI TO DO YOUR TAXES

The boarder income example demonstrates why the dangers of using AI to do your taxes deserve serious attention. The AI did not invent the weekly standard-cost amount. The AI did not completely misunderstand the topic. Instead, the AI omitted an important component of the calculation and presented an oversimplified conclusion.

Those types of errors occur every day. They often look convincing. They frequently go unnoticed. And they can produce incorrect tax returns. That combination creates significant risk for taxpayers.

Final Recommendation

Artificial intelligence will continue to improve. It already delivers substantial benefits to taxpayers, accountants, and businesses.  However, AI remains a tool—not a substitute for professional judgement.

When dealing with New Zealand tax matters, remember the dangers of using AI to do your taxes. AI can hallucinate. AI can misread legislation. AI can confuse jurisdictions. AI can oversimplify complex rules. AI can cite irrelevant sources. Most importantly, AI can reach the wrong conclusion while sounding completely certain.

Before filing a tax return, relying on an exemption, claiming a deduction, or implementing a tax strategy, verify the position against current Inland Revenue guidance or seek professional advice. The cost of professional assistance often pales in comparison with the cost of a reassessment, penalties, interest, or a dispute with Inland Revenue.

The dangers of using AI to do your taxes do not mean you should avoid AI altogether. Instead, use AI as a starting point, not the final authority.

Need Advice on a New Zealand Tax Issue?

If you have questions about property tax, trusts, LTCs, rental income, boarder income, GST, business structures, or any other New Zealand tax matter, contact EpsomTax.com Limited before making assumptions based on an AI-generated answer.

A short conversation today could save you significant tax, penalties, and stress tomorrow.