Tax ID numbers, Social Security numbers, net income, etc. CPAs manage a tremendous amount of valuable information for themselves and for their clients. Keeping it safe is a serious responsibility.
Practices are increasingly turning to artificial intelligence to help with data management and security, but paradoxically, that technology can pose security risks of its own. How can a CPA practice use AI tools effectively while continuing to be responsible for client information cybercriminals are trying to access regularly? That’s where the 2023 Federal Trade Commission Safeguards Rule comes into play.
Using AI to streamline operations
While AI can perform mundane tasks such as drafting emails and providing customer service via chatbot, its greatest value is in processing large amounts of information and making it accessible to humans.
Artificial intelligence has numerous use cases in accounting. AI can be used to analyze and categorize client receipts, learning to identify questionable or duplicate entries. It can research and summarize information from disparate sources in far less time than a human could, while freeing up an accountant’s time to develop insights and make decisions about the data. AI can review and analyze historical data and create budget forecasts.
When complicated tax questions arise, AI can carry out detailed legal research to identify pertinent legislation and regulations. It can be used to automate tax returns. The list is essentially endless.
Risks to look out for
A tool as powerful as AI comes with risks, however. One of the biggest areas of risk associated with AI in accounting is confidentiality. Information that is processed, analyzed, summarized or the like becomes subject to the AI tool’s own cybersecurity vulnerabilities. Users need to weigh the value of the use of AI for a particular application against the possibility of exposure of sensitive information.
Users also need to remember that AI is not infallible. It has been shown to produce results that are incorrect or biased. It’s important to view AI results with a critical eye to look for responses that don’t make sense or perpetuate biases or stereotypes. Often, these kinds of results can be avoided by providing good prompts. Guides and training programs for writing effective AI prompts are beginning to pop up across the internet.
Responsibilities under the FTC Safeguards Rule
As a business that stores personally identifiable information about its clients, a CPA practice must follow federal regulations concerning cybersecurity. In the cybersecurity arena, the Federal Trade Commission has jurisdiction over what it defines as financial institutions, i.e., “companies that offer consumers financial products or services like loans, financial or investment advice, or insurance.” Accounting practices fall squarely under this definition and thus must comply with the FTC’s Safeguards Rule. This set of regulations contains nine main requirements, including elements like naming a Qualified Individual to head the firm’s cybersecurity efforts, carrying out a risk assessment and regularly testing the system for vulnerabilities, and monitoring a firm’s service providers as to their cybersecurity compliance.
Forming the foundation of an accounting practice’s cybersecurity system is a Written Information Security Plan. This overarching document identifies what the firm would do in the event of a security breach — who makes final decisions, who must be contacted and how, and how the breach would be contained. For CPAs, having a WISP is critical, because they must certify on their application for a Preparer Tax Identification Number that they have a WISP in place. Without a PTIN, a CPA cannot file taxes for their clients. Accounting firms that do not have an up-to-date WISP and follow other Safeguards Rule compliance requirements risk having their PTINs revoked.
Experts offer a number of tips to help with making the transition to AI.
Adoption doesn’t have to happen all at once. Practices can try out AI a bit at a time, using it for one application and then adding more as staff become adjusted to it. Products from different AI providers can be tested and compared.
Using clean data is vital. AI cannot make good reports from bad data, so it’s important to follow good data management practices.
Training is key. AI is constantly changing and to make the most of it, associates need ongoing training.
Balancing the rewards and risks behind AI tools is critical. Use the Safeguard Rules as a guide to ensure FTC compliance and risk management.
The Internal Revenue Service may be facing steep cuts in its budget with the win on Tuesday night of President-elect Donald Trump.
Funding for the IRS has become a political issue, with Republicans successfully pushing to cut the extra $80 billion funding from the Inflation Reduction Act of 2022 already during battles over the debt limit.
“I think IRS funding is at significant risk right now, both the annual appropriation funding as well as the remaining IRA funding,” said Washington National Tax Office principal Rochelle Hodes at the Top 25 Firm Crowe LLP.
So far, Republicans have mainly called for cuts in the IRS’s enforcement budget. The increase in enforcement is supposed to be used to pay for the cost of the IRA, but the funding increase is also supposed to be used for taxpayer service and technology improvements.
“The only question for me on funding is, will any portion of the funding remain available for taxpayer service-related improvements at the IRS?” said Hodes.
“I don’t think that will be in the sight line, but the IRA money is part of what’s being used for that,” said Hodes. “As we’ve seen in appropriations bills, there could be language directed at that, that no money can be spent on that initiative.”
A more important priority will be the extension of the expiring provisions of the Tax Cuts and Jobs Act of 2017. “Getting TCJA resolved is going to be the first priority,” said Hodes. “The second question is, how will the cost of that endeavor be determined. If the view that is held by several Senate Republicans wins the day, then the cost of extending the expiring provisions will not be counted under those particular budget rules that are created dealing with extending current policy. If, however, that view is not adopted, then there is a high cost just to TCJA, and so any other provisions with cost will sort of stretch the boundaries of what many in Congress would be comfortable with. I think it will be necessary to see how the scoring goes for extending TCJA provisions.”
Trump has also called for exempting various forms of income, such as tip income, Social Security income and overtime from taxes.
“I also am not sure which of the ideas that were put forward on the campaign trail, other than extending TCJA, are provisions that have true champions who will want to pursue those,” said Hodes.
That may depend on who ends up in Congress, with several important races in the House yet to be decided.
“Although the House remains undecided, the Republicans’ control of the Senate makes it much more likely that Republicans will be able to implement many of Trump’s proposed tax policies, such as making parts of the expiring 2017 TCJA provisions permanent,” said John Gimigliano, principal in charge of the Federal Legislative & Regulatory Services group within KPMG’s Washington National Tax practice, in a statement. “The pressing question now is how the Administration and Congress will fund such an ambitious agenda and what additional measures they might introduce, such as eliminating taxes on tips and overtime. These items will only add to the hefty $4+ trillion price tag they face. Until then, taxpayers should continue to stay apprised of developments and scenario plan for the different outcomes to get ahead.”
Over half of accounting and tax firms plan to increase fees across all services in 2025, according to a new survey.
The survey, released Wednesday by practice management technology company Ignition, found that the majority (around 58%) cited rising business costs as the main motivator for their fee increases, while only 5% are raising prices to increase revenue. Most of the nearly 350 firms surveyed intend to increase fees across services by 5% or 10%.
Some 57% of the respondents plan to increase fees across all services. With regard to tax preparation specifically, 90% of the survey respondents plan to increase fees for individual tax returns, and 87% plan to increase fees for business tax returns. In addition, 70% plan to increase fees for tax planning and advisory services;. 85% plan to increase fees for bookkeeping and accounting services; and 76% plan to increase fees for CFO and controller services.
“While accounting firm owners are embracing price increases in 2025, the report shows that the majority (around 58%) cite rising business costs as the main motivator,” said Ignition global president Greg Strickland in a statement. “Only 5% are raising prices to increase revenue, which indicates an opportunity for firms to leverage pricing as a strategic tool to unlock revenue growth.”
The report found a shift from hourly billing to fixed-fee and value-based pricing, with 79% of the survey respondents indicating they use fixed-fee or value-based pricing for bookkeeping and accounting services. Over half (54%) use fixed-fee or value-based pricing for tax preparation services, 67% use fixed-fee or value-based pricing for tax planning and advisory services, and 75% use fixed-fee or value-based pricing for CFO and controller services.
The report benchmarked current fees for tax, accounting and advisory services, which varied based on firms’ annual revenue range. The biggest variation in pricing was for tax planning and advisory services in particular. For firms with revenue of as much as $250,000, approximately 23% said they charge less than $500 for these services, while a nearly equal number (around 21%) indicated they charge more than $2000.
Illinois voters approved a nonbinding proposal to add an extra 3% levy on annual incomes of more than $1 million, which could fuel a new effort to raise taxes on the state’s highest earners.
The ballot measure – which was an advisory question – won 60% of support, according to the Associated Press. About 90% of the votes have been counted.
“The vote is a gigantic step in the right direction,” said former Governor Pat Quinn, a supporter of the measure.
While the proposal has no legal effect, the vote opens the door to a new debate over ramping up taxes on the rich even as Illinois and Chicago, its biggest city, contend with population declines and a string of departures by major companies and wealthy residents. In 2020, voters rejected a separate measure backed by Governor JB Pritzker to replace the state’s flat tax on incomes with a graduated system that would raise rates on higher-earners.
The Pritzker plan drew staunch opposition from billionaire financier Ken Griffin, who donated about $50 million to help torpedo the initiative. Griffin then left Chicago for Miami in 2022, moving the headquarters of his Citadel empire there as well. Companies from Caterpillar Inc. to Boeing Co. have also departed amid rising concerns over public safety, regulation and taxes.
This year’s referendum asked voters if the Illinois Constitution should be amended to create the additional tax on income over $1 million. It called for using the proceeds to ease the state’s notoriously high property levies.