Lesson 7: Revised SSTS (Effective January 1, 2024)

Your professional standards for tax positions taken with AI assistance

Learning Objectives

After completing this lesson, you will be able to:

Explain the purpose and scope of the Statements on Standards for Tax Services
Describe what changed in the January 1, 2024 revision
Apply SSTS No. 1 (§1.4) to AI-assisted return preparation
Explain why "AI hallucination" is not a defense under the revised SSTS
Describe a defensible AI-assisted return preparation workflow under the revised standards

Overview of the SSTS

The Statements on Standards for Tax Services (SSTS) are promulgated by the AICPA and establish the professional standards for AICPA members who provide tax services. They apply to:

Tax return preparation and review
Tax research and analysis
Tax advice and consulting
Tax representation

Under Georgia Rule 20-12-.19, AICPA professional standards (which include the SSTS) are incorporated into the Georgia CPA license requirements. Violations are not merely professional standards concerns, they are state Board compliance matters.

What Changed in the January 1, 2024 Revision

The AICPA's revised SSTS, effective January 1, 2024, introduced several new provisions of direct relevance to AI use:

SSTS Section 1.4 (New): Reliance on Tools. This entirely new section establishes the member's obligations when relying on tools, including AI, in providing tax services.
New standards on data protection: The revision added standards addressing the member's obligation to protect client data when using tools.
Clarified member responsibility: The revision reinforced that the member remains responsible for all positions taken on a return, regardless of what tools were used.

SSTS No. 1: Tax Return Positions

SSTS §1.4: Reliance on Tools

The revised standard provides (key provisions summarized):

§1.4.1: Section 1.4 provides guidance for members relying on tools in rendering tax services, including return preparation, consulting, and representation.
§1.4.2: "Tools" is broadly defined to include tax preparation software, tax research publications, calculation aids, tax planning software, state and local tax aids, data analytics, statistical models, artificial intelligence, and professional publications and resources.
§1.4.3: "A member should exercise appropriate professional judgment and professional care when relying on a tool."
§1.4.4: "A member may reasonably rely on tools used in providing tax services to a taxpayer. Use of the tool does not absolve the member of his or her professional obligations under AICPA or other applicable ethical standards."
§1.4.7: "Members must take reasonable steps to determine that the tools used are appropriate for their intended purpose."
§1.4.8 (Explanations): "Tools should be used to enhance or improve the member's understanding of a tax issue, not to supplant the member's professional judgment."

§1.4.4 is the key provision: The member is responsible for all positions taken on a return, regardless of what tool was used. This means:

If ChatGPT suggests a deduction that is not available and you include it on the return without verifying it, you are responsible.
If an AI tool applies the wrong tax rate and you do not catch it in review, you are responsible.
If an AI tool cites a regulation that does not exist ("hallucination"), you are responsible for not having verified it.

"AI Hallucination Is Not a Defense"

This is a phrase worth writing on a sticky note and putting on your monitor.

Generative AI models sometimes produce confident-sounding but completely incorrect statements, citing non-existent cases, misquoting statutes, applying wrong rules to right facts, or simply making up numbers. This is commonly called "hallucination."

The revised SSTS makes clear that reliance on a tool's output does not transfer professional responsibility. Under §1.4.4, "use of the tool does not absolve the member of professional obligations." This means:

You must verify AI-generated tax analysis against primary sources (the Internal Revenue Code, Treasury regulations, IRS guidance, relevant case law).
You must review AI-generated numbers against source documents.
You must check AI-cited authorities for existence and accuracy.
You must apply your own professional judgment to AI-generated recommendations before relying on them.

A practitioner who signs a return containing an incorrect position generated by an AI tool, without having reviewed and verified the analysis, has not met the standard of care under SSTS §1.4.

⚠️ RISK: "The AI told me so" is not a defense in an IRS examination, a malpractice claim, or a state board ethics proceeding. SSTS §1.4.4 makes clear that the professional obligation belongs to the member, not the tool.

SSTS No. 3 (Procedural Aspects): Reliance on Information from Others

SSTS No. 3 addresses the practitioner's due diligence obligations when relying on information provided by others, including the client. The key principle: a practitioner is entitled to rely on information provided by the client, but cannot ignore information that appears incorrect, incomplete, or inconsistent.

Application to AI: When an AI tool provides a factual summary or extracts data from source documents, the AI output is "information provided by another" for purposes of SSTS No. 3. The practitioner:

May rely on the AI's extraction in appropriate circumstances
Must verify the extraction when the information "appears to be incorrect, incomplete, or inconsistent"
Cannot simply assume the AI extracted the right numbers from the right documents
Should take steps to review AI-summarized content against the original source documents for material items

📌 PRACTICE TIP: If you use AI to extract data from W-2s, 1099s, or K-1s, build a review step into your workflow where you compare the AI-extracted data to the original documents for each client. Document that review. This is the SSTS No. 3 "reasonable inquiry" in the context of AI-assisted data extraction.

A Defensible AI-Assisted Return Preparation Workflow Under SSTS

Here is what a compliant AI-assisted workflow looks like:

Step 1: Select appropriate tools. The tools used are appropriate for the engagement (§1.4.7). This means: the tool has been evaluated for accuracy and reliability in the specific use case (not just generally).
Step 2: Use AI for efficiency, not judgment. Use AI to draft, organize, extract, and summarize. Apply your own professional judgment to the analysis. Flag AI-generated positions for verification.
Step 3: Verify primary sources. Any AI-generated legal analysis must be traced to the actual Code, regulations, or guidance cited. Any AI-generated factual extraction must be compared to the original source documents.
Step 4: Review the output as if reviewing a junior associate's work. SSTS and the revised Circular 230 treat AI output as equivalent to work product from another person. Supervise it accordingly.
Step 5: Document your review. Note in your workpapers that AI was used and that you reviewed the output. Note any corrections you made. This is your evidence of compliance with §1.4.3's professional judgment requirement.
Step 6: The practitioner signs, not the AI. You are the preparer of record. Your signature on the return is your representation that you have reviewed it and it is correct to the best of your knowledge.

Key Takeaways

The revised SSTS, effective January 1, 2024, added Section 1.4 (Reliance on Tools), which specifically addresses AI and other tools used in tax practice.
SSTS §1.4.4 establishes the core principle: using a tool does not transfer professional responsibility. The member remains responsible for all positions taken on a return.
"AI hallucination is not a defense", a practitioner who relies on incorrect AI output without verification has failed to meet SSTS standards.
SSTS No. 3 (Procedural Aspects) requires reasonable inquiry when information from any source, including AI, appears incorrect, incomplete, or inconsistent.
A defensible AI workflow involves using AI for efficiency while applying professional judgment to all positions, verifying primary sources, and documenting the review.

Quick Review

Q1: A CPA uses an AI tool that generates a tax memo recommending a deduction for a home office. The AI cites Rev. Rul. 2019-15, which the CPA does not verify. The ruling does not exist. The return is prepared and filed with the deduction. An IRS examination occurs. The CPA says "I relied on the AI." What is the result under SSTS?

Answer: The CPA has failed to comply with SSTS §1.4.4 and §1.4.3. The member is responsible for positions taken on the return regardless of tool use. The "AI told me so" explanation is not a defense. The CPA failed to verify the cited authority, a basic step in professional due diligence. Disciplinary risk exists.

Q2: A practitioner uses an AI OCR tool to extract figures from a 1099-B. The AI extracts the proceeds correctly but fails to extract the cost basis (a common OCR error with certain form formats). The practitioner reviews the AI output against the original 1099-B and catches the error. What is the SSTS result?

Answer: Compliant. The practitioner exercised appropriate professional judgment and care (§1.4.3), used the tool appropriately (§1.4.7), and treated the AI output as "information from another" subject to reasonable verification (SSTS No. 3). The practitioner caught and corrected the error, which is exactly what the standards require.

Q3: A tax partner at a firm directs a staff associate to "run the client's files through the AI system and have it prepare first drafts of all returns." The partner reviews and signs all returns. Assuming the SSTS Reliance on Tools standard, is this compliant?

Answer: It can be compliant if the partner's review is genuine and thorough. The key is whether the partner is actually applying professional judgment to the returns or merely rubber-stamping the AI output. If the partner exercises real review, checking positions, verifying sources, confirming numbers, the workflow is defensible under SSTS §1.4.4. If the "review" is cursory, the partner is not meeting the professional obligation.

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