IRS AI Rules Leave Disclosure Gap as 60% Use AI Weekly

The IRS issued its first AI guidance for tax preparers in June, requiring verification of AI-generated work — but stopped short of mandating client disclosure, even as 60 percent of tax professionals use AI weekly.

"Because we have no formal guidance yet on this topic, our recommendation would be, be safe, as opposed to finding out, 'uh-oh, I should have gotten this,'" said Henry Grzes, lead manager for tax practice and ethics at the American Institute of Certified Public Accountants.

Section 7216 of the Internal Revenue Code bars tax preparers from sharing or using taxpayer information beyond return preparation without a signed disclosure. The IRS's last formal guidance on the statute dates to 2013, Grzes said. A June survey from Blue J and CPA.com of more than 1,000 tax professionals found 60 percent use AI for tax research at least weekly, up from 33 percent in 2025. The same survey showed 44 percent use AI for advisory projects, 40 percent for tax planning, and 35 percent for drafting.

Knowingly violating Section 7216 carries a fine of up to $1,000 and up to one year in jail, or both. The AICPA has formally requested additional IRS guidance on AI use in its 2026 response to the agency's annual priority-setting request, and practitioners who skip disclosures now could face exposure if the IRS tightens rules later.

The ambiguity centers on whether generative AI tools that ingest client data function like tax software — which is exempt from Section 7216 disclosure requirements — or like third-party processors that require explicit client consent. Joshua Youngblood, founder of The Youngblood Group in Dallas and an IRS enrolled agent, argues the distinction matters.

"I would argue that [an AI tool] is really not just like your tax software, because a lot of people are relying on AI to make judgment calls and to tell them what to do," said Youngblood, who co-owns an AI tool that provides tax research but does not ingest client data.

The type of AI platform also matters, Grzes said. An open platform that uses input to train itself poses different privacy risks than a closed platform that does not — a distinction the IRS could address through additional guidance. A 2024 report from the Thomson Reuters Institute, based on a survey of 330 tax and accounting firm professionals, found about 25 percent used public-facing generative AI tools in their work, while just 9 percent had used proprietary tax-specific generative AI technology.

Section 7216 Guidance Stalled Since 2013

For taxpayers, the practical question is whether their preparer uses AI and what safeguards exist. Grzes said consumers should ask about the "guardrails" their tax preparer has established to prevent personal information from being shared with unintended parties.

"If the response is something along the lines of 'don't worry,' 'everything is safe' or something similar, without explaining what those safeguards are, I would be concerned," Grzes said.

For non-individual tax returns, preparers can include Section 7216 disclosures in their engagement letter. For individual returns, the disclosure must be a separate document, Grzes said. Elizabeth Beastrom, president of tax, audit and accounting professionals at Thomson Reuters, said the practitioner remains "fully accountable and in the loop" when AI is used solely to prepare a specific client's return with that client's data protected.

Paper Returns Now Take 30 Days

The disclosure question arrives as the IRS faces operational strain. A Government Accountability Office report released July 23 found the agency's paper return processing system could not process 2025 tax year returns during the first six weeks of filing season. Average processing time for paper individual returns rose to 30 days from 16 days in the 2025 filing season, while paper Form 941 processing stretched to 72 days from 45 days.

The IRS ended filing season with about 8,100 submission processing employees, down 18 percent from a year earlier, and sent 3.7 million business paper returns to outside vendors for scanning — a 725 percent increase from the prior year. Paper refund issuance slowed to an average of 36 days from 13 days.

Despite these delays, the IRS processed about 98 percent of the 177 million returns received, with 95 percent filed electronically.

For tax practitioners, the absence of clear rules creates a compliance dilemma: adopt AI aggressively and risk running afoul of Section 7216, or wait for guidance and fall behind competitors. For consumers, the near-term answer is straightforward — ask how AI is used before signing a return.

This article is for informational purposes only and does not constitute investment advice.