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Tax expert systems and benefits from using them.

Because the tax laws are so complex and tax considerations have such significant impact upon businesses and financial decisions made by individuals, tax areas have been excellent domains for expert systems development. Today, tax expert systems are used by many public accounting firms. The Internal Revenue Service (IRS) has begun developing and using expert system in their day-to-day operations. This increased use of tax expert systems has been an evolutionary process over the previous six to eight years and has occurred because of the advantages and benefits offered by these systems. It appears that the development and use of tax expert systems will only increase in the future.

The purpose of this article is to:

1. Briefly explain the basic components of an expert system;

2. Describe some of the different tax expert systems being constructed and used in public accounting and by the IRS; and

3. Provide several of the benefits or advantages such expert systems provide to their users.

Components of an Expert System

The American Institute of Certified Public Accountants has defined an expert system as a computer program that reflects the thinking process of human experts to achieve a level of performance comparable to those experts in a specific area. An expert system "captures" a human expert's knowledge about an issue and uses that knowledge to solve complex problems in a narrowly defined area.

The two primary components of an expert system are the knowledge base and the inference engine. The knowledge base consists of the facts about a specific problem area and rules for using those facts to solve complex problems. These facts and rules are obtained from a human expert.

The inference engine guides the system's use of the knowledge stored in the knowledge base. It "drives" the expert system as it draws an inference by relating facts supplied by the user to the knowledge and rules contained in the knowledge base. In this manner the system reaches a decision about the problem it is attempting to solve.

Many expert system have two additional components -- a user interface and an explanation facility. The user interface component provides communication between the inference engine and the person using the system. The system asks questions and the user provides responses.

An explanation facility explains to the user why questions are asked. It can also specify why a particular conclusion was reached.

Tax Expert Systems

There are a number of prototype and commercial tax expert systems in use today. Others are being developed. In this section several tax expert systems used in public accounting and by the IRS are briefly described.

Taxman I and II produce an analysis of the tax consequences of certain corporate reorganization transactions. The systems are capable of representing the rules and concepts which determine if a tax-free reorganization exists for different situations.

TAXADVISOR solves problems concerning income and transfer tax planning for individuals. The system makes recommendations to maximize the wealth an individual transfers at death.

INVESTOR aids in the selection of appropriate oil and gas or real estate tax shelters.

ExperTAX is one of the more successful tax expert systems. It was developed by Coopers and Lybrand. The system supports the corporate tax accrual and planning process. It identifies significant issues for tax compliance and tax planning.

TA is a system that is used to analyze constructive stock ownership attribution rules.

IF-THEN is an expert system used to determine if prizes and awards are taxable income.

As discussed earlier, the IRS has become involved in the development and use of tax expert systems. The IRS has developed or is constructing a significant number of systems. Some of the IRS expert systems pertain to:

1. Selecting items on individual tax returns with high audit potential.

2. Aiding in determining if reasonable cause exists for allowing penalty abatement.

3. Selecting estate tax returns for possible audit.

4. Helping determine if a suggested pension plan meets regulation requirements.

5. Screening tax returns selected as missing certain 1099 income.

Benefits from Tax Expert Systems

There are a number of benefits that tax expert systems can provide to their users.

One obvious benefit is the supplying of valuable, complex knowledge. As more commercial tax expert systems are developed, more complex tax knowledge will become available. If an accounting firm has limited experience and expertise in a particular tax area, a commercial expert system could provide that expertise.

Another advantage derived from tax expert systems is increase productivity. A consultation with an expert system can be conducted much more quickly than a review of the current tax law, cases, etc. As a result the accountant has more time to spend addressing other areas of his/her practice.

Perhaps one of the most significant benefits from using tax expert systems is uniform performance. Assuming no change in the tax law, an accountant will consistently resolve a complex tax issue each time the issue is raised, even if it occurs infrequently. Also, if an accounting firm has an office in New York and an office in Dallas, the two offices will reach the same conclusion concerning similar tax issues with the use of a firm-wide tax expert system.

Human experts die or retire. If their knowledge and expertise is captured in a tax expert system, that knowledge and expertise can be used indefinitely. The system would need to be modified only if the applicable tax law changed.

Another benefit from using tax expert systems is that the least experienced staff accountant can have access to the wisdom and knowledge of the most experienced partners in the firm. This can be accomplished by consulting with the appropriate tax expert system.

The type of tax expert system described in this article can also be used as an education or training device. As new accountants are hired, they can be introduced to the firm's expert systems and use them to develop addition knowledge in complex tax areas.


It appears that the "future" of tax expert systems has arrived "today", and if not today, then very soon. There are several commercial tax expert systems in use and more are being developed. The IRS has gotten involved in the development process as well.

As more tax expert systems are developed and placed in commercial use, more and more knowledge will become available to accountants. Armed with these systems, the accountant's productivity will increase, giving him/her an advantage over competing accountants. Therefore, the accountant of the future will rely upon tax expert systems similar to those described in this article.


American Institute of Certified Public Accountants, An Introduction to Artificial Intelligence and Expert Systems, New York, 1987.

Jay Liebowitz, Introduction to Expert Systems, Santa Cruz, 1988.

Robert H. Michalesen and William F. Messier, "Expert Systems in Taxation," Journal of the American Taxation Association, Spring, 1987.

Carol E. Brown and Irva Kay Streit, "A Survey of Tax Expert Systems," Expert Systems Review for Business and Accounting, March, 1988.

Carol E. Brown, "Tax Expert Systems in Industry and Accounting," Expert Systems Review for Business and Accounting, June, 1988.

R. Steve McDuffie, DBA, CPA, is an associate professor of accounting at Southwest Missouri State University. His primary teaching areas are auditing and accounting information systems. His research interests are in all aspects of auditing and expert systems.
COPYRIGHT 1992 National Society of Public Accountants
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Debits and Credits; development and use of tax expert systems
Author:Mcduffie, R. Steve
Publication:The National Public Accountant
Article Type:Column
Date:Oct 1, 1992
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