My Thoughts on ChatGPT and Tax Planning

I think ChatGPT is a great tool that can help you crank out letters, essays, and do some research. Coincidentally, it also does some decent tax research and can help you identify some areas of the Internal Revenue Code and give you the answers on how the laws work. That being said, I believe we’re a long way from Artificial Intelligence or some level of machine learning having the ability to help you plan to save taxes. The reason for this is that this type of computing is great and generating answers based on a static set of information, but not very helpful in prescribing to you a plan of action or a series of steps that you should take in the future. Let’s go through a couple of examples of how tax planning works and see why we at Advise RE insist on working with our clients throughout the year, not just once a year around April.

A Story of Two Outcomes

Let’s imagine this scenario to see how tax planning really works. Imagine you decide to undertake a renovation of your home. You decide that the floorplan just has too many separate rooms and it would be nicer looking if the plan was more open to convey a sense of spaciousness. After consulting with an architect and engineer to ensure that opening the walls can be achieved while not compromising the structural integrity of your home, you commence demolition of some of the interior and lo and behold, a bag filled with $100,000 in cash emerges from the dust after apparently being hidden away for so long. By the way, please don’t just tear down walls by yourself, consult an architect and engineer first before doing anything of the sort.

Excited but concerned, you decide to do a quick search on the internet and you write in the query “What if you find money unexpectedly in your home?” The software might come back to you with a result about the Cesarini case from the early 1960s. In this case, the Cesarini family found in their piano that they purchased back in the 1950s around $4,000 of cash. This was a LOT of money back then, it might have even bought you a whole home somewhere in the US. They reported this on their tax return and then the following year amended their filing to exclude that income. This triggered an IRS audit and when the family was questioned as to why the income was amended to be excluded, they argued that it was just sheer luck they found it and nobody should be taxed on sheer luck! The IRS and eventually the court disagreed with the Cesarini family and they were unfortunately forced to pay income tax on this find. What a bummer.

This court case bears the same fact pattern as your situation in the renovation. So we can conclude that you need to include $100,000 of income on your 1040 and call it a day right? Well, ChatGPT would probably say so and call it a day.

But if you asked me, I’d still have questions.

The Questions

Since I’m a tax professional, I need to ask you to clarify some points in case there’s another outcome. Here’s how the conversation might look like:

Me: When did you purchase the home?

You: I actually I didn’t buy the home, I inherited it from my Uncle, who passed away 3 years ago.

Me: Ok great, and when did your Uncle buy the home?

You: Well, I remember him telling me he bought the land and built it with his own two hands 40 years ago.

Me: Very cool.

I think this is very cool because now we have a different case. I’d argue that the cash you found is actually an inheritance, since your Uncle left you his home including everything within the 4 walls. Under IRC 102, gifts, bequests, devises, and inheritances are excluded from taxable income to the recipient. I’d like to see ChatGPT is going to ask you the same questions. That may come in our lifetimes, but it’s not available at the time of this writing.

Tax Planning and You

For the above example, this is why we work with our clients year round, not just when it’s time to file taxes. For one, you can’t plan for something that already occurred, so saving taxes on things that happened last year is impossible. Tax planning requires an open transaction, an open year, and a constant, iterative, back and forth between client and tax professional to achieve an optimal outcome. The main reason for this is that there is a massive amount of law to consider in addition to clarifying regulations issued by the IRS, court cases, revenue rulings, revenue procedures, and a whole array of other tools and facts that the professional needs to consider when assisting you. Being able to apply this wide array of knowledge takes time and consideration. Don’t be surprised if you ask us a question and we don’t have the answer immediately available to you! As you can see above, there are angles to every transaction that need to be analyzed before coming up to a conclusion, which is an exercise in gathering facts.

I am reminded of someone who once put their profit and loss statement in front of me and asked “ok, based on these numbers, where are the tax savings?” If only it was so easy. Again, with my questions, I might ask what type of company is it? Who are the employees? Where is the office located? What ways does it generate revenue? What is the legal structure of the entity? Who are the owners? All of these questions above will help us narrow in on exclusions, deductions, tax calculations, and credits. But none of these questions will ever be answered by just looking at one sheet of financial data.

Hopefully the above clarifies why constant engagement throughout the year is crucial to a successful tax planning engagement. Reach out to us if you want to get more involved by clicking the Contact Us button below.

-Stephen Morris, CPA, MBT, CCIM